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 flexible-price allocation by means of an interest-rate rule that reacts to deviations of the stock-price level from the flexible-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. (C) 2011 Elsevier Inc. All rights reserved.

Monetary policy and stock-price dynamics in a DSGE framework / Nistico', Salvatore. - In: JOURNAL OF MACROECONOMICS. - ISSN 0164-0704. - STAMPA. - 34:1(2012), pp. 126-146. [10.1016/j.jmacro.2011.09.008]

Monetary policy and stock-price dynamics in a DSGE framework

NISTICO', SALVATORE
2012

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 flexible-price allocation by means of an interest-rate rule that reacts to deviations of the stock-price level from the flexible-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. (C) 2011 Elsevier Inc. All rights reserved.
2012
dsge models; monetary policy; stock prices; wealth effects
01 Pubblicazione su rivista::01a Articolo in rivista
Monetary policy and stock-price dynamics in a DSGE framework / Nistico', Salvatore. - In: JOURNAL OF MACROECONOMICS. - ISSN 0164-0704. - STAMPA. - 34:1(2012), pp. 126-146. [10.1016/j.jmacro.2011.09.008]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11573/380185
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