Policy Shocks in a Monetary Asset-Pricing Model with Endogenous Production

In a framework of a monetary asset pricing model with production the effects of monetary and fiscal policy shocks are investigated. The model is kept simple enough to generate explicit formulae for the equilibrium price functions. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with stochastic fiscal policy changes, while the impact of structural fiscal policy on the stock market depends on the level of private consumption in the economy. Moreover, shares provide protection against inflation form monetary shocks, and a suitably chosen structural fiscal policy can be used to achieve a stabilization of the real rates of return of both assets.