Abstract:During the last 25 years, the stock market in the US has been strongly pro-cyclical in the presence of a counter-cyclical monetary policy. In this paper, we use an endogenous business cycle model to explore the factors contributing to a pro-cyclical stock market. A dynamic expectation structure in the real sector gives rise to a strong non-linearity and is responsible for the emergence of endogenous business cycles in the model. In the context of this model, we find that a timid or ineffective monetary policy … Show more
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