 Monetary policy and stock-price dynamics in a DSGE frameworkJournal of Macroeconomics, 2012, vol. 34, issue 1, 126-146 Abstract: This paper analyzes the role of stock prices in driving monetary policy for price stability in a non-Ricardian DSGE model. It shows that the dynamics of the interest rate consistent with price stability requires a response to stock-price changes that depends on the shock driving them: a supply shock (e.g. productivity) does not require an additional, dedicated response relative to the standard Representative-Agent framework, while a demand shock does. Moreover, we show that implementing the flexible-price allocation by means of an interest-rate rule that reacts to deviations of the stock-price level from the flexible-price equilibrium incurs risks of endogenous instability that are the higher the less profitable on average equity shares. On the other hand, reacting to the stock-price growth rate is risk-free from the perspective of equilibrium determinacy, and can be beneficial from an overall real stability perspective. Keywords: Monetary policy; DSGE models; Stock prices; Wealth effects (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:34:y:2012:i:1:p:126-146 DOI: 10.1016/j.jmacro.2011.09.008 Access Statistics for this article Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos More articles in Journal of Macroeconomics from Elsevier |
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