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Title:Stock prices and monetary policy: Re-examining the issue in a New Keynesian model with endogenous investment PDF Logo
Authors:Grossi, Michele
Tamborini, Roberto
Issue Date:2011
Series/Report no.:Economics Discussion Papers 2011-54
Abstract:In this paper, the authors present a New Keynesian quantitative model with endogenous investment and a stock-market sector to shed further light on two unsettled issues: whether central banks should include some financial indicator in their policy rules, and what indicator may be expected to generate better stabilization performance. For comparative purposes, the authors replicate the policy framework and assessment strategy of the well-known no-inclusion model of Bernanke-Gertler (1999, 2000) and assess performance of five policy rules. Two of these are traditional Taylor rules (i.e., do not incorporate financial indicators) that differ in the relative weight they put on output and inflation gaps. The other three are financial Taylor rules. These involve the addition of one financial indicator in each case. Specifically, the deviation from trend of stock prices, of Tobin's q (the rate of change in stock prices relative to capital stock) and of investment. The authors obtain results that are at variance with Bernanke-Gertler, first, because the best performing rule of the traditional rules is output aggressive instead of inflation aggressive and, second, because the financial rule with Tobin's q outperforms the traditional inflation-aggressive one under all dimensions and cases. However, the authors cannot draw a univocal conclusion as regards the comparison between the financial rule with Tobin's q and the traditional but output aggressive rule.
Subjects:New Keynesian models
monetary policy
stock markets and bubbles
JEL:E5
E52
Creative Commons License:http://creativecommons.org/licenses/by-nc/2.0/de/deed.en
Document Type:Working Paper
Appears in Collections:Economics: The Open-Access, Open-Assessment E-Journal - Discussion Papers

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