Monetary Policy and Stock Prices in an Open Economy |
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Authors: | GIORGIO DI GIORGIO SALVATORE NISTICÒ† |
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Institution: | Giorgio Di Giorgio;is Professor of Monetary Economics, Department of Economics, LUISS "Guido Carli," Rome (E-mail:). Salvatore Nisticò;is Post-doc Research Fellow, Department of Economics, Universitá"G. D'Annunzio," Pescara, and Department of Economics, LUISS "Guido Carli," Rome (E-mail:). |
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Abstract: | This paper studies monetary policy in a two-country model where agents can invest their wealth in both stock and bond markets. In our economy the foreign country hosts the only active equity market where also residents of the home country can trade stocks of listed foreign firms. We show that, in order to achieve price stability, the Central Banks in both countries should grant a dedicated response to movements in stock prices driven by relative productivity shocks. Determinacy of rational expectations equilibria and approximation of the Wicksellian interest rate policy by simple monetary policy rules are also investigated. |
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Keywords: | E43 E44 E52 E58 |
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