The Stock Market Channel of Monetary Policy

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1999

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Abstract

argues that the stock market is an important channel of monetary policy. Monetary policy affects real economic activity because inflation levies a property tax on stocks in addition to an income tax on dividend payments. Inflation thus taxes stocks more heavily than it does bonds. Households alter their required rate of return as inflation changes, and firms adjust production in order to satisfy their shareholders` demands. As the stock market channel grows in importance, the appropriate intermediate target for the central bank is the price level, with price stability being the ultimate goal.

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Scholars@Duke

Fullenkamp

Connel Fullenkamp

Professor of the Practice of Economics

Professor Fullenkamp specializes in the investigation of financial market development and regulation of financial markets. His projects often involve the exploration of such variables as immigrant worker remittances, economic policy, and the development of countries. His completed papers have appeared in various leading academic journals, including The Cato Journal, the Journal of Banking and Finance, the Review of Economic Dynamics, and the Review of Economics and Statistics. Titles of his publications include, “Capital Trading, Stock Trading, and the Inflation Tax on Equity” with Scott Baier, Charles Carlstrom, Ralph Chami, Thomas Cosimano, and Timothy Fuerst; “Assessing Individual Risk-Attitudes Using Field Data from Lottery Games” with Rafael Tenorio and Robert Battalio; “Are Immigrant Remittance Flows a Source for Capital Development” with Ralph Chami and Samir Jahjah; and more. Professor Fullenkamp is currently focusing his studies on the impact of immigrant remittances on economic growth and the framework for financial market development.


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