Monetary Policy and Stock Prices in an Open Economy

Giorgio Di Giorgio and Salvatore Nisticò

Journal of Money, Credit and Banking, 2007, vol. 39, issue 8, 1947-1985

Abstract: This paper studies monetary policy in a two-country model where agents can invest their wealth in both stock and bond markets. In our economy the foreign country hosts the only active equity market where also residents of the home country can trade stocks of listed foreign firms. We show that, in order to achieve price stability, the Central Banks in both countries should grant a dedicated response to movements in stock prices driven by relative productivity shocks. Determinacy of rational expectations equilibria and approximation of the "Wicksellian" interest rate policy by simple monetary policy rules are also investigated. Copyright 2007 The Ohio State University.

Date: 2007
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