Stock Prices and Monetary Policy Shocks : a General Equilibrium Approach

Content Provider	Semantic Scholar
Author	Challe, Edouard Giannitsarou, Chryssi
Copyright Year	2011
Abstract	Empirical literature documents that unexpected changes in the nominal interest rates have a signi cant e¤ect on real stock prices: a 100-basis point increase in the nominal interest rate is associated with an immediate decrease in broad real stock indices that may range from 2.2 to 9 percent, followed by a gradual decay as real 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 is a production economy with elastic labor supply, staggered price and wage setting, as well as time-varying risk aversion through habit formation. We nd that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our ndings are robust to a range of variations and parametrizations of the model. Keywords: Monetary policy; Asset prices; New Keynesian general equilibrium model JEL Classification: E31, E52, G12 We are grateful to Alexis Anagnostopoulos, Harjoat Bhamra, Eva Carceles-Poveda, Tiago Cavalcanti, Harris Dellas, Bernard Dumas, Elisa Faraglia, Wouter den Haan, Mike Haliassos, Urban Jermann, Christian Julliard, Paul Klein, Romanos Priftis, Anastasia Zervou and two anonymous referees for helpful discussions and comments on our paper. We also thank seminar and conference participants at the 7th Conference on Research on Economic Theory & Econometrics, EEA-ESEM 2008, Macroeconomics and Financial Frictions Workshop at EUI, Warwick University, Paris I Sorbonne, Paris School of Economics, Ecole Polytechnique and University of Edinburgh. Edouard Challe acknowledges the support of chaire FDIR. Chryssi Giannitsarou acknowlegdes nancial support from the ESRC (award ES/K002112/1). yCNRS (UMR 7176), Ecole Polytechnique and Banque de France. Email: edouard.challe@polytechnique.edu zFaculty of Economics, University of Cambridge, and CEPR. E-mail : cg349@cam.ac.uk.
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Language	English
Access Restriction	Open
Subject Keyword	Estimated Kind of quantity - Equilibrium Money Pin grid array Risk aversion Shock
Content Type	Text
Resource Type	Article