Monetary Policy and Stock Price Index (on the basis of the wealth effect of the stock market boom) in a DSGE Framework

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Abstract

In this study to evaluate the wealth effect of increasing stock prices index on consumption and macroeconomic variables and also study the behavior of central banks in financial instability condition, a model of dynamic stochastic general equilibrium (DSGE) was designed. then, variables impulse response functions against technology shocks, monetary shock, government consumption expenditure shock and the stock price index were evaluated under two scenarios Central Bank. According to the first scenario, the central bank only reacts to the output and inflation gap through changes in money and by the second scenario, the central bank also reacts to stock price index gap in addition to output and inflation gap. According to variables response functions against one standard deviation of stock price index shock, at the moment of shock, inflation under both scenarios increased, but the consumption and production under both scenarios the central bank initially dropped and then began to rise as after just five of consumption and production increase. Thus it can be seen that the wealth effect increase in the stock price index on consumption and production is small and is created After some period. Therefore, it is recommended due to Lag and small increase of the stock price index on consumption and production, Central banks in order to financial stability and economic does not reduce money growth (as a political tool)

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