A Theory of the Nominal Character of Stock Securities

Abstract We construct recursive solutions for, and study the properties of dynamic equilibrium an economy with three types agents: (i) household/investors who supply labor a finite elasticity, consume large variety goods that are not perfect substitutes trade government bonds; (ii) firms produce those varieties goods, receive productivity shocks set prices in Calvo manner; (iii) collects income-driven fiscal surplus acts mechanically, buying selling bonds accordance Taylor policy rule based on expected inflation. In this setting, we show stock market returns much less than one-for-one related to inflation over 1-year holding period, which means securities have strong nominal character. also their character diminishes as length stock-holding period increases, empirical evidence.