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Stock Market, Interest Rate and Output: A Model and Estimation for US Time Series Data

Author

Listed:
  • Chiarella Carl

    (School of Finance and Economics, University of Technology, Sydney, Australia)

  • Semmler Willi

    (Center for Empirical Macroeconomics, Bielefeld and New School University)

  • Mittnik Stefan

    (Dept. of Economics, University of Kiel, Germany)

  • Zhu Peiyuan

    (School of Finance and Economics, University of Technology, Sydney, Australia)

Abstract
In this paper we construct a model of stock market, interest rate and output interaction which is a generalization of the well known 1981 model of Blanchard. We allow for imperfect substitutability between stocks and bonds in the asset market and for lagged portfolio adjustment. The reaction of agents to changes in the stock market is dependent on the state of the economy. We analyze the dynamics of the model and its local stability properties. A discretization in terms of observable variables is derived. Some empirical results for U.S. output, stock price and interest rate data are presented using nonlinear least square estimates. We perform some stochastic simulations of the estimated non-linear model, obtaining distributions of the key economic quantities, their autocorrelation structure and financial statistics which are compared with historical data and RBC models. In addition, following Mittnik and Zadrozny (1993) a VAR with confidence bands for historical data is estimated and cumulative impulse-response functions compared to the model's impulse response functions. We find that the model captures a number of features of the data.Acknowledgements: Willi Semmler wants to acknowledge financial support from the CEPA of the New School University and the Ministry of Science and Technology of the State of Northrhine-Westfalia, Germany. Carl Chiarella acknowledges support from Australia Research Council grant number: A79802872.

Suggested Citation

  • Chiarella Carl & Semmler Willi & Mittnik Stefan & Zhu Peiyuan, 2002. "Stock Market, Interest Rate and Output: A Model and Estimation for US Time Series Data," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(1), pages 1-39, April.
    • Handle: RePEc:bpj:sndecm:v:6:y:2002:i:1:n:2
    DOI: 10.2202/1558-3708.1001
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    References listed on IDEAS

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    Cited by:

    1. Peter Flaschel & Willi Semmler, 2004. "Real-Financial Interaction: A Reconsideration of the Blanchard Model with a State-of-Market Dependent Reaction Coefficient," International Symposia in Economic Theory and Econometrics, in: Economic Complexity, pages 31-65, Emerald Group Publishing Limited.
    2. F. Cavalli & A. Naimzada & N. Pecora, 2022. "A stylized macro-model with interacting real, monetary and stock markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(1), pages 225-257, January.
    3. Willi Semmler, 2011. "Asset Prices, Booms and Recessions," Springer Books, Springer, number 978-3-642-20680-1, December.
    4. Lambert, Dayton M. & Lowenberg-DeBoer, James & Malzer, Gary L., 2004. "A Systems Approach For Evaluating On-Farm Site-Specific Management Trials: A Case Study With Variable Rate Manure And Crop Quality Response To Inputs," 2004 Annual meeting, August 1-4, Denver, CO 20091, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Harper, David C. & Lambert, Dayton M. & Larson, James A. & Gwathmey, C. Owen, 2012. "Potassium carryover dynamics and optimal application policies in cotton production," Agricultural Systems, Elsevier, vol. 106(1), pages 84-93.
    6. Angelos Kanas & Christos Ioannidis, 2010. "Causality from real stock returns to real activity: evidence of regime-dependence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(2), pages 180-197.
    7. Carl Chiarella & Peter Flaschel & Reiner Franke & Willi Semmler, 2000. "Output, Financial Markets and Growth," Working Paper Series 108, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    8. Raberto, Marco & Teglio, Andrea & Cincotti, Silvano, 2006. "A dynamic general disequilibrium model of a sequential monetary production economy," Chaos, Solitons & Fractals, Elsevier, vol. 29(3), pages 566-577.
    9. Peter Woehrmann, "undated". "A dynamic model of the financial�real interaction as a model selection criterion for nonparametric stock market prediction," IEW - Working Papers 226, Institute for Empirical Research in Economics - University of Zurich.

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