The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence

Galí, Jordi and Luca Gambetti
Authors registered in the RePEc Author Service: Jordi Galí

No 10070, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which stock prices end up increasing persistently in response to an exogenous tightening of monetary policy, even though they experience a small decline in the short run. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.

Keywords: Leaning against the wind policies; Financial stability; Inflation targeting; Asset price booms (search for similar items in EconPapers)
JEL-codes: E52 G12 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence (2015)
Working Paper: The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence (2015)
Working Paper: The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence (2014)
Chapter: The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence (2013)
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