Equity prices are major sources of shocks to the world economy and channels for
propagation of these shocks. We seek to calibrate macroeconomic effects of falls in share
prices and assess appropriate policy responses, using the National Institute Global
Econometric Model NiGEM. Based on estimated relationships, falls in US equity prices have
significant impacts on global activity; potential for liquidity traps suggest a need for
complementary monetary and fiscal policy easing. However, fiscal easing boosts long-term
real interest rates and hence moderates one of the automatic shock absorbers provided by the
market mechanism
