The response of asset prices to monetary policy shocks: Stronger than thought

Lucia Alessi and Mark Kerssenfischer

Journal of Applied Econometrics, 2019, vol. 34, issue 5, 661-672

Abstract: Standard macroeconomic theory predicts rapid responses of asset prices to monetary policy shocks. Small‐scale vector autoregressions (VARs), however, often find sluggish and insignificant impact effects. Using the same high‐frequency instrument to identify monetary policy shocks, we show that a large‐scale dynamic factor model finds overall stronger and quicker asset price reactions compared to a benchmark VAR, both on euro area and US data. Our results suggest that incorporating a sufficiently large information set is crucial to estimate monetary policy effects.

Date: 2019
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https://doi.org/10.1002/jae.2706

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Working Paper: The response of asset prices to monetary policy shocks: stronger than thought (2016)
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