The impact of monetary policy on asset prices

Roberto Rigobon and Brian P. Sack

No 2002-4, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Estimating the response of asset prices to changes in monetary policy is complicated by the endogeneity of policy decisions and the fact that both interest rates and asset prices react to numerous other variables. This paper develops a new estimator that is based on the heteroskedasticity that exists in high frequency data. We show that the response of asset prices to changes in monetary policy can be identified based on the increase in the variance of policy shocks that occurs on days of FOMC meetings and of the Chairman's semi-annual monetary policy testimony to Congress. The identification approach employed requires a much weaker set of assumptions than needed under the \"event-study\" approach that is typically used in this context. The results indicate that an increase in short-term interest rates results in a decline in stock prices and in an upward shift in the yield curve that becomes smaller at longer maturities.

Keywords: Monetary policy; Asset pricing (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-cba, nep-fmk and nep-mon
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Citations: View citations in EconPapers (60)

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Related works:
Journal Article: The impact of monetary policy on asset prices (2004)
Working Paper: The Impact of Monetary Policy on Asset Prices (2002)
Working Paper: The Impact of Monetary Policy on Asset Prices (2002)
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