Stock Prices and Monetary Policy: Re-Examining the Issue in a New Keynesian Model with Endogenous Investment

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. For comparative purposes, the authors replicate the policy framework and assessment strategy of the well-known "no-inclusion" model of 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. Terms of use: Documents in JEL E5, E52

Rules versus discretion at the Federal Reserve System: On to the second century

“…12 Two of the seminal papers were Bernanke and Gertler (1999) and Cecchetti et al (2000). Recently published empirical exercises that provide some support for this kind of use of asset prices include Grossi and Tamborini (2011) and Gambacorta and Signoretti (2011). For a theoretical argument that financial frictions like those that figured importantly in the 2007-9 crisis create the basis for a systematic monetary response to the prices of financial assets, see Curdia and Woodford (2009).…”