Identifying the interdependence between US monetary policy and the stock market

Hilde Bjørnland () and Kai Leitemo

Journal of Monetary Economics, 2009, vol. 56, issue 2, 275-282

Abstract: We estimate the interdependence between US monetary policy and the S&P 500 using structural vector autoregressive (VAR) methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature [Christiano, L.J., Eichenbaum, M., Evans, C.L., 1999. Monetary policy shocks: what have we learned and to what end? In: Taylor, J.B., Woodford, M. (Eds.), Handbook of Macroeconomics, vol. 1A. Elsevier, New York, pp. 65-148]. We find great interdependence between the interest rate setting and real stock prices. Real stock prices immediately fall by seven to nine percent due to a monetary policy shock that raises the federal funds rate by 100 basis points. A stock price shock increasing real stock prices by one percent leads to an increase in the interest rate of close to 4 basis points.

Keywords: VAR; Monetary; policy; Asset; prices; Identification (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (220)

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Related works:
Working Paper: Identifying the interdependence between US monetary policy and the stock market (2008)
Working Paper: Identifying the Interdependence between US Monetary Policy and the Stock Market (2005)
Working Paper: Identifying the interdependence between US monetary policy and the stock market (2005)
Software Item: RATS programs to replicate Bjornland-Leitemo(2009) SVAR with short- and long-run restrictions
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:56:y:2009:i:2:p:275-282

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