UK Stock Market, Monetary Policy, and the Real Economy

This project aims to assess the macroeconomic effects of stock prices in the UK. Specifically, it will explore the effects of UK stock prices on: i) consumption (at different wealth levels), ii) labour market outcomes (for different skill groups and industries), iii) the monetary policy reaction of the Bank of England.

For the US, using textual analysis of the Federal Open Market Committee documents, Cieslak and Vissing-Jorgensen (2021) document that Fed policymakers do pay attention to the stock market as they believe that stock prices affect the labour market through a consumption wealth effect. Whether this is also the case in the UK is an open question. But before answering this question, measuring (i.e., estimating) those (wealth) effects on UK consumption and the labour market will be the first step. In the second step, the project will explore the minutes of the Monetary Policy Committee of the Bank of England to understand how the Bank reacts to stock market fluctuations. In the third step, the project will develop a dynamic general equilibrium model, similar to Çenesiz and Guimarães (2022), who show that income effects have important (qualitative and quantitative) effects on the labour market. The model will then be used to analyse a number of policy relevant questions (e.g., optimal monetary policy).