Intertemporal Substitution Effect of Consumption, Macroeconomic Policy Announcements and the Dynamic Adjustment of Stock Prices

Peir-Shyan Liaw ()
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Peir-Shyan Liaw: Department of Economics, Tunghai University, Taiwan

Journal of Economics and Management, 2015, vol. 11, issue 2, 163-198

Abstract: This paper presents a macroeconomic model in a closed economy based on the framework developed by Blanchard (1981), Laban and Larrain (1994), Obstfeld (1994), Barro (1997), Lai (2011), Lai and Fang (2012), and others. In view of the intertemporal substitution effect of consumption, the free adjustment of full employment output and commodity prices and the instantaneous adjustment assumption of commodity prices, the model uses the announcement effect approach of rational expectations to investigate the dynamic adjustment pattern of stock prices. This paper concludes that if the policy authority executes the monetary policy announcement, then the chip effect, the liquidity effect, the dividend effect, the sign and magnitude of the slope between the two unstable arms and the time lag between the policy¡¦s announcement and execution are the key factors influencing the dynamic adjustment pattern of the stock price.

Keywords: intertemporal substitution effect of consumption; chip effect; liquidity effect; dividend effect; asset substitution degree; mis-adjustment (search for similar items in EconPapers)
JEL-codes: E62 F31 F41 (search for similar items in EconPapers)
Date: 2015
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