Template-type: ReDIF-Paper 1.0
Author-Name: Bernard Dumas
Author-Name-First: Bernard
Author-Name-Last: Dumas
Author-Name: Marcel R. Savioz
Author-Name-First: Marcel R.
Author-Name-Last: Savioz
Author-Person: psa1226
Title: A theory of the nominal character of stock securities
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.
Length: 55 pages
Creation-Date: 2020
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2020/working_paper_2020_03
File-Format: text/html
Number: 2020-03
Classification-JEL: E44, E52
Keywords: Stock market, monetary policy, inflation-targeting
Handle: RePEc:snb:snbwpa:2020-03