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Monetary shocks are found to be transitory, indicating no long-run relationship between money and stock prices, consistent with the model’s predictions.",{"@graph":14,"@context":73},[15,34,56],{"@type":16,"itemListElement":17},"BreadcrumbList",[18,23,27,31],{"item":19,"name":20,"@type":21,"position":22},"https://docshare.wps.com","Home","ListItem",1,{"item":24,"name":25,"@type":21,"position":26},"https://docshare.wps.com/document/","Document",2,{"item":28,"name":29,"@type":21,"position":30},"https://docshare.wps.com/document/research-report/","Research & 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transmission channel does the paper focus on?","Question",{"text":63,"@type":64},"It studies how monetary policy transmits through the stock market, specifically via the price of equities that influences firms’ demand for capital.","Answer",{"name":66,"@type":61,"acceptedAnswer":67},"What does the theoretical model predict about money and real activity?",{"text":68,"@type":64},"It predicts an unambiguously negative relationship, where shocks to money affect real activity through stock prices.",{"name":70,"@type":61,"acceptedAnswer":71},"Do monetary shocks have permanent or transitory effects?",{"text":72,"@type":64},"Empirical evidence indicates monetary effects on stock prices are transitory, implying no long-run relationship between money and stock 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channel of monetary transmission through the stock market.Theoret-ically,the model predicts an unambiguously negative relationship between money and realactivity through the stockprices channel.Empirically,the evidence is in favor of apredominantlynegative correlation between money and stock prices,mainly in the period prior to the 1980s.However,shocks to money have a transitory effect on stock prices.  \n## 1.Introduction\n\nMonetary policy has been one of the most important macroeconomictools in modern economic analysis.However,its relative effectiveness andultimate power has been challenged over the last decades by several schoolsof thought.Particularly,in the 1980s with the emergence of the real businesscycle school,attention has shifted from monetary aspects of business fluc-tuations to real aspects.In this class of models,money is essentially endog-enous with output causing money,and the correlation between money andreal activity is positive;see,for example,King and Plosser(1984).Morerecently,efforts have centered on accommodating models based on opti-mizing principles to reflect a sensitivity to monetary arrangements in general.For instance,Lucas(1987)has indicated that money should be an ingredientin the modern general equilibrium approach to macroeconomics.  \nIn this spirit,some theoretical and empirical papers have emergedtrying to account for a view where money is exogenous and the correlationbetween money and real activity is positive.Theoretical models along theselines include Christiano(1991),Fuerst(1992),Christiano and Eichenbaum(1992),and Schlagenhauf and Wrase(1992).These authors focus on liquidityeffects of monetary policy;that is,an increase in some monetary aggregatespills overto a decrease in interest rates and a consequent spur in real activity.Authors such as Cochrane(1989),Sims(1992),Eichenbaum(1992),andBernanke and Blinder(1992)have tackled this issue from an empiricalperspective.  \n*I thank the helpful comments of Jeff Zabel and of two anonymous referees for this journal.Any errors or shortcomings are my own.  \nJournal of Macroeconomics,Summer 1995,Vol.17,No.3,pp.495-514Copyright ◎1995 by Louisiana State University Press0164-0704/95/$1.50  \nMarcelo Bianconi  \nThis paper looks at the question of monetary policy transmissionthrough a channel that has not yet been discussed by any of the authorsmentioned above,namely the stock market.I present a simple theoreticalgeneral equilibrium model with finance constraints on consumption andassets along the lines of Lucas(1990),and distortionary taxes and the dynamicfinancial decision of the firm explicitly taken into account along the linessuggested by Brock and Turnovsky(1981).Then,I show theoretically thatthe effect of monetary policy on real activity is unambiguously negative.Thechannel of monetary transmission is through the price of stocks which ul-timately determines the demand for capital by firms.The rate of growth ofsome measure of the money stock,which functions as a measure of inflation,determines the market price of equities,which in turn will determine thelevel of the capital stock in the economy.  \nThe channel of monetary policy studied in the theoretical part leads toa few empirically testable hypotheses.Here,I focus on three tests.Oneregards the assumption of the exogeneity of the monetary aggregate whichin my model depends on the causal relationship between the monetaryaggregate and the stock price.The other is the model's implication that therate of growth of some monetary aggregate and the discount factor on capitalgains are negatively correlated,which empirically depends on the correlationbetween the monetary aggregate and the stock price.And third,I test ifmonetary shocks have permanent or transitory effects on stock prices.  \nI present some empirical evidence using nonborrowed reserves as ameasure of the monetary aggregate.The empirical evidence","cbCaiccDtKfGAYrS","https://ap.wps.com/l/cbCaiccDtKfGAYrS","pdf",1018204,"English","# 1. Introduction\n# 2. The Model\n## 2. The Model","[{\"question\":\"What transmission channel does the paper focus on?\",\"answer\":\"It studies how monetary policy transmits through the stock market, specifically via the price of equities that influences firms’ demand for capital.\"},{\"question\":\"What does the theoretical model predict about money and real activity?\",\"answer\":\"It predicts an unambiguously negative relationship, where shocks to money affect real activity through stock prices.\"},{\"question\":\"Do monetary shocks have permanent or transitory effects?\",\"answer\":\"Empirical evidence indicates monetary effects on stock prices are transitory, implying no long-run relationship between money and stock prices.\"}]","Inflation and the Real Price of Equities - Theory with Some Empirical Evidence | PDF"]