Working Paper: NBER ID: w28186
Authors: Bernard Dumas; Marcel Savioz
Abstract: We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) house-hold/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 income-driven 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.
Keywords: Nominal Stock Returns; Inflation; Dynamic Equilibrium Model; Productivity Shocks; Fiscal Policy
JEL Codes: G12; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity shocks (O49) | real stock returns (G17) |
| productivity shocks (O49) | inflation (E31) |
| nominal stock returns (G12) | inflation (E31) |
| nominal stock returns (G12) | nominal character of stocks (G12) |
| holding period (C41) | nominal character of stocks (G12) |