Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89004
Authors: 
Matsumoto, Akito
Cova, Pietro
Pisani, Massimiliano
Rebucci, Alessandro
Year of Publication: 
2011
Series/Report no.: 
IDB Working Paper Series IDB-WP-252
Abstract: 
This paper studies equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1998) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. This paper shows that introducing news shocks in canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of new shocks. In addition, it is shown that neglecting to account for policy news shocks (e. g. , policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.
JEL: 
E32
F30
F40
G11
Document Type: 
Working Paper

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