Journal article
Monetary policy and stock price dynamics with limited asset market participation
Journal of macroeconomics, v 36, pp 1-22
Jun 2013
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
► I study a New-Keynesian DSGE model with limited asset market participation (LAMP). ► If LAMP is significant, responding to stock prices facilitates equilibrium determinacy and learnability of REE. ► Otherwise, it is likely to induce aggregate instability, in the form of learnable sunspot equilibria. ► The results hold both under contemporaneous and forward-looking interest rate rules.
We study a New-Keynesian DSGE model subject to limited asset market participation (LAMP) and assess whether monetary policy should respond to stock prices for what concerns the determinacy and the learnability (E-stability) of the Rational Expectations Equilibrium (REE). We find that interest rate rules granting a positive response to stock prices facilitate both the determinacy and the E-stability of the fundamental REE when the degree of LAMP is sufficiently large to generate an inverted aggregate demand channel of monetary policy transmission. Moreover, according to our analysis, policy rules responding to stock prices appear to perform better than more standard rules responding to output with respect to both equilibrium determinacy and aggregate welfare.
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Details
- Title
- Monetary policy and stock price dynamics with limited asset market participation
- Creators
- Marco Airaudo - Drexel University
- Publication Details
- Journal of macroeconomics, v 36, pp 1-22
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000318386400001
- Scopus ID
- 2-s2.0-84876104492
- Other Identifier
- 991019168628504721
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- Web of Science research areas
- Economics