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Intertemporal Substitution Effect of Consumption, Macroeconomic Policy Announcements and the Dynamic Adjustment of Stock Prices

Author

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  • Peir-Shyan Liaw

    (Department of Economics, Tunghai University, Taiwan)

Abstract

This paper presents a macroeconomic model in a closed economy based on the framework developed by Blanchard (1981), Laban and Larrain (1994), Obstfeld (1994), Barro (1997), Lai (2011), Lai and Fang (2012), and others. In view of the intertemporal substitution effect of consumption, the free adjustment of full employment output and commodity prices and the instantaneous adjustment assumption of commodity prices, the model uses the announcement effect approach of rational expectations to investigate the dynamic adjustment pattern of stock prices. This paper concludes that if the policy authority executes the monetary policy announcement, then the chip effect, the liquidity effect, the dividend effect, the sign and magnitude of the slope between the two unstable arms and the time lag between the policy¡¦s announcement and execution are the key factors influencing the dynamic adjustment pattern of the stock price.

Suggested Citation

  • Peir-Shyan Liaw, 2015. "Intertemporal Substitution Effect of Consumption, Macroeconomic Policy Announcements and the Dynamic Adjustment of Stock Prices," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 11(2), pages 163-198, July.
    • Handle: RePEc:jec:journl:v:11:y:2015:i:2:p:163-198
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    More about this item

    Keywords

    intertemporal substitution effect of consumption; chip effect; liquidity effect; dividend effect; asset substitution degree; mis-adjustment;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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