News shocks and asset price volatility in general equilibrium |
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Authors: | Akito Matsumoto Pietro Cova |
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Institution: | a International Monetary Fund, 700 19th St. N.W. Washington, DC 20431, USA b Bank of Italy, Via Nazionale, 91 00184 Rome, Italy c Inter-American Development Bank, 1300 New York Ave. N.W. Washington, DC 20577, USA |
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Abstract: | We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices. |
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Keywords: | News shocks Equity prices Productivity Monetary policy Asset price volatility |
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