Stock prices and monetary policy shocks: A general equilibrium approach

Edouard Challe and Chryssi Giannitsarou

Journal of Economic Dynamics and Control, 2014, vol. 40, issue C, 46-66

Abstract: 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.

Keywords: Monetary policy; Asset prices; New Keynesian general equilibrium model (search for similar items in EconPapers)
JEL-codes: E31 E52 G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (22)

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Related works:
Working Paper: STOCK PRICES AND MONETARY POLICY SHOCKS: A GENERAL EQUILIBRIUM APPROACH (2012)
Working Paper: Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach (2011)
Working Paper: Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:40:y:2014:i:c:p:46-66

DOI: 10.1016/j.jedc.2013.12.005

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