Stock Market Conditions And Monetary Policy In A DSGE Model For The U.S

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Executive Summary

This paper investigates the interactions between stock market fluctuations and monetary policy within a DSGE model for the U.S. economy. First, the authors design a framework in which fluctuations in households financial wealth are allowed - but not necessarily required - to exert an impact on current consumption. This is due to the interaction, in the financial markets, of long-time traders holding wealth accumulated over time with newcomers holding no wealth at all. Importantly, they introduce nominal wage stickiness to induce pro-cyclicality in real dividends. Additional nominal and real frictions are modeled to capture the pervasive macroeconomic persistence of the observables employed to estimate the model.

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