Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach
Edouard Challe () and
Chryssi Giannitsarou ()
No 8387, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Recent empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on stock prices: a 25-basis point increase in the Fed funds rate is associated with an immediate decrease in broad stock indices that may range from 0.5 to 2.3 percent, followed by a gradual decay as stock prices revert towards their long-run expected value. In this paper, we assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. The model we consider allows for 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 parameterizations of the model.
Keywords: Asset prices; Monetary policy; New Keynesian general equilibrium model (search for similar items in EconPapers)
JEL-codes: E31 E52 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Stock prices and monetary policy shocks: A general equilibrium approach (2014)
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)
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