Identifying the interdependence between US monetary policy and the stock market

Hilde Bjørnland () and Kai Leitemo

No 2008/04, Working Paper from Norges Bank

Abstract: We estimate the interdependence between US monetary policy and the S&P 500 using structural 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 et al., 1999). We find great interdependence between interest rate setting and real stock prices. Real stock prices immediately fall by 7-9 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)
JEL-codes: E43 E52 E61 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2008-04-10
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Citations: View citations in EconPapers (37)

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https://www.norges-bank.no/en/news-events/news-pub ... apers/2008/WP-20084/

Related works:
Journal Article: Identifying the interdependence between US monetary policy and the stock market (2009)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2008_04

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