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

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

No 724, Working Papers from Barcelona School of Economics

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, after a a short-run decline, stock prices increase persistently in response to an exogenous tightening of monetary policy. 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: inflation targeting; financial stability; leaning against the wind policies; asset price booms (search for similar items in EconPapers)
JEL-codes: E52 G12 (search for similar items in EconPapers)
Date: 2015-09
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 (3)

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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 (2014)
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)
Working Paper: The effects of monetary policy on stock market bubbles: Some evidence (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:724

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