Stock Market Dynamics and the Central Bank in a General Equilibrium Model

Jukka Ilomaki and Hannu Laurila
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Hannu Laurila: Faculty of Management, University of Tampere

No 1715, Working Papers from Tampere University, Faculty of Management and Business, Economics

Abstract: We introduce a general equilibrium model with potentially inefficient stock markets consisting of asymmetrically informed investors. Prices are sticky in the goods market, but the labor market adjusts perfectly. The central bank aims to maximize the life-time wealth of the households in every period by keeping inflation in the steady state and stock markets in the fair value by adjusting the rate of return on risk-free investments. We find that the “leaning against the wind” policy works, which means that positive stock market bubbles can be eliminated by raising the risk-free rate.

Keywords: interest rate; monetary policy; portfolio choice (search for similar items in EconPapers)
JEL-codes: E44 E52 G11 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2017-05
New Economics Papers: this item is included in nep-mac and nep-mon
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http://urn.fi/URN:ISBN:978-952-03-0459-1 First version, 2017 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tam:wpaper:1715

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