Financial market segmentation,stock market volatility and the role of monetary policy |
| |
Institution: | 1. The London School of Economics and Political Science, Houghton St, London WC2A 2AE, UK;2. University of Roehampton, Roehampton Ln, London SW15 5PU, UK |
| |
Abstract: | We study a segmented financial markets model where only the agents who trade stocks encounter financial income risk. In such an economy, the welfare-maximizing monetary policy attains the novel role of redistributing the traders' financial market risk among all agents in the economy. In order to do that, optimal monetary policy reacts to financial market movements; it is expansionary in bad times for the financial markets and contractionary in good ones. In our quantitative exercise, a dividend shock generates different policy responses and consumption paths among the optimal and the 2% inflation targeting policy. The latter implies large distributional welfare losses and risk sharing losses of similar magnitude with those generated by business cycle fluctuations. In addition, the optimal monetary policy does not minimize stock price volatility and implies lower inflation volatility than other commonly used policies. |
| |
Keywords: | Limited participation Optimal monetary policy Distributional effects Stock price volatility |
本文献已被 ScienceDirect 等数据库收录! |
|