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Stock Market Dynamics and the Central Bank in a General Equilibrium Model

Author

Listed:
  • Ilomaki Jukka
  • Laurila Hannu

    (Faculty of Management, University of Tampere)

Abstract

We introduce a general equilibrium model with potentially inefficient stock markets consisting of asymmetrically informed investors. Prices are sticky in the goods market, but the labor market adjusts perfectly. The central bank aims to maximize the life-time wealth of the households in every period by keeping inflation in the steady state and stock markets in the fair value by adjusting the rate of return on risk-free investments. We find that the “leaning against the wind” policy works, which means that positive stock market bubbles can be eliminated by raising the risk-free rate.

Suggested Citation

  • Ilomaki Jukka & Laurila Hannu, 2017. "Stock Market Dynamics and the Central Bank in a General Equilibrium Model," Working Papers 1715, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:1715
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    File URL: http://urn.fi/URN:ISBN:978-952-03-0459-1
    File Function: First version, 2017
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    References listed on IDEAS

    as
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    9. Mr. Lars E. O. Svensson, 2016. "Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?," IMF Working Papers 2016/003, International Monetary Fund.
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    More about this item

    Keywords

    interest rate; monetary policy; portfolio choice;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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