The Stock Market Channel of Monetary Policy

Thomas Cosimano, Connel Fullenkamp and Ralph Chami

No 1999/022, IMF Working Papers from International Monetary Fund

Abstract: This paper argues that the stock market is an important channel of monetary policy. Monetary policy affects real economic activity because inflation levies a property tax on stocks in addition to an income tax on dividend payments. Inflation thus taxes stocks more heavily than it does bonds. Households alter their required rate of return as inflation changes, and firms adjust production in order to satisfy their shareholders’ demands. As the stock market channel grows in importance, the appropriate intermediate target for the central bank is the price level, with price stability being the ultimate goal.

Keywords: WP; capital stock; economic activity; price level; money supply; nonbank firm; transmission mechanism; inflation tax; channel of monetary policy; asset pricing; real value; nominal interest rate; stock ownership; rate of return; shareholder activist; monetary policy shock; stock channel; return volatility; Stocks; Stock markets; Inflation; Asset prices; Monetary base (search for similar items in EconPapers)
Pages: 25
Date: 1999-02-01
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Citations: View citations in EconPapers (15)

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