Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129076
Authors: 
Yanovski, Boyan
Year of Publication: 
2016
Series/Report no.: 
FinMaP-Working Paper 60
Abstract: 
During the last 25 years, the stock market in the US has been strongly pro-cyclical in the presence of a counter-cyclical monetary policy. In this paper, we use an endogenous business cycle model to explore the factors contributing to a pro-cyclical stock market. A dynamic expectation structure in the real sector gives rise to a strong non-linearity and is responsible for the emergence of endogenous business cycles in the model. In the context of this model, we find that a timid or ineffective monetary policy allows the stock market to be dominated by the fluctuations of profits in the real sector. We model the potential ineffectiveness of monetary policy in terms of an endogenous risk premium. The model is calibrated to fit key properties of the data. In particular, it can generate a pro-cyclical stock market in the presence of a counter-cyclical monetary policy.
Subjects: 
pro-cyclical stock market
Tobin's average Q
endogenous cycles
heterogeneous expectations
monetary policy
JEL: 
C03
D84
E12
E32
E52
G00
Document Type: 
Working Paper
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