2Yıldız Technical University, Department of Economics
The purpose of this paper is to analyze the dynamics of stock price movements as an example of asset prices, under the conditions of different expectation formations and to show the effects of an expansionary monetary policy on these movements. This analysis applies the model established by Blanchard (1981) based on the standard IS-LM Model and expanded with Tobin’s q Theory. Although Blanchard set his model as a differential equation system with two dynamic variables (real income and real stock market value ), he probably did so due to difficulty of visual expression of more variables. System dynamics approach provides an opportunity to add the real interest rate as a third variable and to use time lag values of some variables, as Samuelson (1939) did in his study.
Moreover, with this dynamic approach, we modeled the asset price expectations and wealth accumulation in the form of differential equations. The main distinguishing factor of this paper is a non-Walrasian analysis method that allows trade under uncertain market conditions in which demand-supply equality is not satisfied. Furthermore, this analysis differentiates between the desired and realized demands and supplies of equities and bonds of firms and households. Thus, we can consider buying and selling actions under the possibility of excess demand or excess supply for assets. Under the framework of the expanded Blanchard (1981) model, we analyzed the influence of the expansionary monetary policy on stock price with a different type of expectation formations like naive (static), adaptive, and trend following.