IDEAS home Printed from https://ideas.repec.org/p/zbw/fmpwps/60.html
   My bibliography  Save this paper

A pro-cyclical stock market under a countercyclical monetary policy in a model of endogenous business cycles

Author

Listed:
  • Yanovski, Boyan

Abstract

During the last 25 years, the stock market in the US has been strongly pro-cyclical in the presence of a counter-cyclical monetary policy. In this paper, we use an endogenous business cycle model to explore the factors contributing to a pro-cyclical stock market. A dynamic expectation structure in the real sector gives rise to a strong non-linearity and is responsible for the emergence of endogenous business cycles in the model. In the context of this model, we find that a timid or ineffective monetary policy allows the stock market to be dominated by the fluctuations of profits in the real sector. We model the potential ineffectiveness of monetary policy in terms of an endogenous risk premium. The model is calibrated to fit key properties of the data. In particular, it can generate a pro-cyclical stock market in the presence of a counter-cyclical monetary policy.

Suggested Citation

  • Yanovski, Boyan, 2016. "A pro-cyclical stock market under a countercyclical monetary policy in a model of endogenous business cycles," FinMaP-Working Papers 60, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    • Handle: RePEc:zbw:fmpwps:60
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/129076/1/849032210.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Marc Lavoie, 2014. "Post-Keynesian Economics: New Foundations," Post-Print hal-01343652, HAL.
    2. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    3. Franke, Reiner & Ghonghadze, Jaba, 2014. "Integrating Real Sector Growth and Inflation Into An Agent-Based Stock Market Dynamics," FinMaP-Working Papers 4, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    4. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    5. James Tobin & William C. Brainard, 1976. "Asset Markets and the Cost of Capital," Cowles Foundation Discussion Papers 427, Cowles Foundation for Research in Economics, Yale University.
    6. Engelbert Stockhammer, 2004. "The Rise of Unemployment in Europe," Books, Edward Elgar Publishing, number 3111.
    7. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, March.
    8. Ben Zipperer & Peter Skott, 2011. "Cyclical patterns of employment, utilization, and profitability," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 34(1), pages 25-58.
    9. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    10. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    11. Bhaduri, Amit & Marglin, Stephen, 1990. "Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies," Cambridge Journal of Economics, Oxford University Press, vol. 14(4), pages 375-393, December.
    12. Franke Reiner, 2012. "Microfounded Animal Spirits in the New Macroeconomic Consensus," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-41, October.
    13. Franke, Rainer & Yanovski, Boyan, 2015. "On the long-run equilibrium value of Tobin's average Q," FinMaP-Working Papers 49, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    14. Chiarella,Carl & Flaschel,Peter & Franke,Reiner, 2011. "Foundations for a Disequilibrium Theory of the Business Cycle," Cambridge Books, Cambridge University Press, number 9780521369923.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Robert A. Blecker, 2016. "Wage-led versus profit-led demand regimes: the long and the short of it," Review of Keynesian Economics, Edward Elgar Publishing, vol. 4(4), pages 373-390, October.
    2. Christian Schoder, 2015. "A Keynesian Dynamic Stochastic Labor-Market Disequilibrium model for business cycle analysis," IMK Working Paper 157-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Gennaro Zezza & Michalis Nikiforos, 2017. "Stock-flow Consistent Macroeconomic Models: A Survey," EcoMod2017 10762, EcoMod.
    4. Scharfenaker, Ellis, 2020. "Implications of quantal response statistical equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    5. Jan Behringer & Christian A. Belabed & Thomas Theobald & Till van Treeck, 2013. "Einkommensverteilung, Finanzialisierung und makroökonomische Ungleichgewichte," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 82(4), pages 203-221.
    6. Christian A Belabed & Thomas Theobald & Till van Treeck, 2018. "Income distribution and current account imbalances [Notes on capacity utilisation, distribution and accumulation]," Cambridge Journal of Economics, Oxford University Press, vol. 42(1), pages 47-94.
    7. Schoder, Christian, 2020. "A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis," Economic Modelling, Elsevier, vol. 86(C), pages 117-132.
    8. Anthony J. Makin, 2014. "The Paradoxes and Pitfalls of Revived Fiscal Activism," Economic Affairs, Wiley Blackwell, vol. 34(1), pages 59-67, February.
    9. Rodepeter, Ralf & Winter, Joachim, 1999. "Rules of thumb in life-cycle savings models," Sonderforschungsbereich 504 Publications 99-81, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    10. Lucas Papademos, 2005. "Macroeconomic theory and monetary policy: the contributions of Franco Modigliani and the ongoing debate," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 58(233-234), pages 187-214.
    11. Pope, Robin & Selten, Reinhard & Kube, Sebastian, 2009. "Nominalist Heuristics and Economic Theory," Bonn Econ Discussion Papers 17/2009, University of Bonn, Bonn Graduate School of Economics (BGSE).
    12. Flaschel, Peter & Charpe, Matthieu & Galanis, Giorgos & Proaño, Christian R. & Veneziani, Roberto, 2018. "Macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 237-256.
    13. Asahi Noguchi, 2020. "Shifting Policy Strategy in Keynesianism," Papers 2006.11749, arXiv.org.
    14. Nishi, Hiroshi & Stockhammer, Engelbert, 2020. "Distribution shocks in a Kaleckian model with hysteresis and monetary policy," Economic Modelling, Elsevier, vol. 90(C), pages 465-479.
    15. von Hagen, Jürgen & Kube, Sebastian & Kaiser, Johannes & Selten, Reinhard & Pope, Robin, 2006. "Prominent Numbers and Ratios in Exchange Rate Determination: Field and Laboratory Evidence," Bonn Econ Discussion Papers 29/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    16. Ashok Chakravarti, 2012. "Institutions, Economic Performance and the Visible Hand," Books, Edward Elgar Publishing, number 14751.
    17. Melina Dritsaki & Chaido Dritsaki, 2022. "Comparison of HP Filter and the Hamilton’s Regression," Mathematics, MDPI, vol. 10(8), pages 1-18, April.
    18. Sinelnikov-Murylev, Sergei (Синельников-Мурылев, Сергей) & Drobyshevskiy, Sergei (Дробышевский, Сергей) & Kazakova, Maria (Казакова, Мария), 2014. "Decomposition of the russian GDP growth rate in 1999-2014 [Декомпозиция Темпов Роста Ввп России В 1999—2014 Годах]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 7-37, October.
    19. Hsu, Po-Hsuan & Huang, Dayong, 2010. "Technology prospects and the cross-section of stock returns," Journal of Empirical Finance, Elsevier, vol. 17(1), pages 39-53, January.
    20. Stamegna, Marco, 2022. "A Kaleckian growth model of secular stagnation with induced innovation," MPRA Paper 113794, University Library of Munich, Germany.

    More about this item

    Keywords

    pro-cyclical stock market; Tobin's average Q; endogenous cycles; heterogeneous expectations; monetary policy;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G00 - Financial Economics - - General - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:fmpwps:60. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/vakiede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.