Equity Pricing in New Keynesian Models with Nominal Rigidities and Investment

This paper derives explicitly an equity pricing relationship in a simple New Keynesian model. This relationship is used to study the equity pricing implications of New Keynesian models. I i¬ nd that New Keynesian models sui¬€er from the same asset pricing shortcomings as more traditional RBC versions and that this can be attributed to the presence of nominal rigidities. I then add capital adjustment costs to study how the interaction of both investment adjustment costs and capital adjustment costs ai¬€ect the results.