Monetary Policy and Stock-Price Dynamics in a DSGE Framework

Salvatore Nisticò

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper analyzes the role of stock prices in driving Monetary Policy for price stability in a Non-Ricardian DSGE model. It shows that the dynamics of the interest rate consistent with price stability requires a response to stock-price changes that depends on the shock driving them: a supply shock (e.g. productivity) does not require an additional, dedicated response relative to the standard Representative-Agent framework, while a demand shock does. Moreover, we show that implementing the exible-price allocation by means of an interest-rate rule that reacts to deviations of the stock-price level from the exible-price equilibrium incurs risks of endogenous instability that are the higher the less profitable on average equity shares. On the other hand, reacting to the stock-price growth rate is risk-free from the perspective of equilibrium determinacy, and can be beneficial from an overall real stability perspective.

Keywords: Monetary Policy; DSGE Models; Stock Prices; Wealth Effects. (search for similar items in EconPapers)
JEL-codes: E12 E44 E52 (search for similar items in EconPapers)
Date: 2012-02-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Monetary policy and stock-price dynamics in a DSGE framework (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:307

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