00:01
Explain how the asset price shadow of monetary policy works through stock market and house prices.
00:09
The fluctuations in the stock market have important impacts on the economy and these fluctuations are influenced by the central bank's monetary policies.
00:53
So transition mechanisms involving the stock market affect the economy in three different ways.
01:02
First of all, this is through their effects on investment in the stock market.
01:10
Investment is determined by stock prices.
01:39
A well -known theory that describes how fluctuating stock prices affect the aggregate economy is tobin -cuse theory.
01:46
So based off of this theory, expansionary monetary policy, which leads to a lower interest rate, makes stocks relatively more attractive than bonds.
02:05
Higher demand for stocks drives up their prices.
02:08
So secondly, changes in stock prices have effects on a firm's balance sheet.
03:33
So this is called the firm balance sheet effect.
03:36
It works through the effect on stock prices on the firm's balance sheet.
03:42
Expansionary policy rises the stock prices of the firm, as we mentioned before, and that increases the net worth of the company.
04:19
So therefore people are more likely to invest in the company.
04:22
Funds to finance investments can rise.
04:41
So this leads to higher output.
04:53
Stock prices also affect a household's wealth and liquidity because they are directly related to the amount of financial wealth a household has.
05:23
The higher the amount of financial assets, such as stocks, relative to a household's debt, the lower the risk for financial distress.
05:33
Consumers are less reluctant to purchase durable products and spend on residential and housing assets...