Working Paper: CEPR ID: DP15507
Authors: Bernard J. Dumas; Marcel Ren Savioz
Abstract: We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) household/investors who supply labor with a finite elasticity, consume a large variety of goods that are not perfect substitutes and trade government bonds; (ii) firms that produce those varieties of goods, receive productivity shocks and set prices in a Calvo manner; (iii) a government that collects an exogenous fiscal surplus and acts mechanically, buying and selling bonds in accordance with a Taylor policy rule based on expected inflation. In this setting we show that stock market returns are much less than one-for-one related to inflation over a one-year holding period, which means that stock securities have a strong nominal character. We also show that their nominal character diminishes as the length of the stock-holding period increases, in accordance with empirical evidence.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation (E31) | stock market returns (G17) |
| productivity shocks (O49) | stock market returns (G17) |
| productivity shocks (O49) | inflation (E31) |
| productivity shocks (O49) | stock market returns and inflation (G17) |
| real stock returns (G17) | inflation (E31) |