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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

Abstract: 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)
Date: 2011-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Stock prices and monetary policy shocks: A general equilibrium approach (2014) Downloads
Working Paper: STOCK PRICES AND MONETARY POLICY SHOCKS: A GENERAL EQUILIBRIUM APPROACH (2012) Downloads
Working Paper: Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach (2011) Downloads
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