SHOCKS AND SHOCK ABSORBERS: THE INTERNATIONAL PROPAGATION OF EQUITY MARKET SHOCKS AND THE DESIGN OF APPROPRIATE POLICY RESPONSES

Ray Barrell and E Davis ()

Economics and Finance Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

Abstract: Equity prices are major sources of shocks to the world economy and channels for propagation of these shocks. We seek to calibrate macroeconomic effects of falls in share prices and assess appropriate policy responses, using the National Institute Global Econometric Model NiGEM. Based on estimated relationships, falls in US equity prices have significant impacts on global activity; potential for liquidity traps suggest a need for complementary monetary and fiscal policy easing. However, fiscal easing boosts long-term real interest rates and hence moderates one of the automatic shock absorbers provided by the market mechanism.

Pages: 25 pages
Date: 2005-06
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
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