Stock prices and monetary policy shocks: A general equilibrium approach
Journal of Economic Dynamics and Control
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Challe, E., & Giannitsarou, C. (2014). Stock prices and monetary policy shocks: A general equilibrium approach. Journal of Economic Dynamics and Control, 40 46-66. https://doi.org/10.1016/j.jedc.2013.12.005
Empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on real stock prices: a 100-basis point increase in the nominal interest rate is associated with an immediate decrease in broad real stock indices that may range from 2.2 to 9%, followed by a gradual decay as real stock prices revert towards their long-run expected value. We assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. We consider a production economy with elastic labor supply, staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parametrizations of the model.
monetary policy, asset prices, New Keynesian general equilibrium mode
Edouard Challe acknowledges the support of chaire FDIR. Chryssi Giannitsarou acknowledges support from the Economic and Social Research Council (grant number ES/K002112/1).
External DOI: https://doi.org/10.1016/j.jedc.2013.12.005
This record's URL: https://www.repository.cam.ac.uk/handle/1810/267156
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