Stock Market Dynamics and the Central Bank in a General Equilibrium Model
Ilomäki, Jukka; Laurila, Hannu (2017)
Tampereen yliopisto
2017
Johtamiskorkeakoulu - Faculty of Management
This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.
Julkaisun pysyvä osoite on
https://urn.fi/URN:ISBN:978-952-03-0459-1
https://urn.fi/URN:ISBN:978-952-03-0459-1
Tiivistelmä
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.
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.