Does Monetary Policy React to Asset Prices? Some International Evidence

Francesco Furlanetto

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: This paper attempts to measure the reaction of monetary policy to the stock market. We apply the procedure of Rigobon and Sack (2003) to identify and estimate a VAR in the presence of heteroskedasticity. This procedure fully takes into account the endogeneity of interest rates and stock returns that is ignored in the traditional VAR literature. We find a positive and significant reaction in the US and the UK. However, since the end of the 1990s, in a period of large stock market fluctuations, this reaction declines in the US and disappears in the UK. In Japan and the EU, we do not find any reaction. We provide evidence that the lower response to stock prices in the last part of the sample in the US is compensated by a higher response to real estate prices.

Keywords: monetary policy; stock market; identifcation; VAR; heteroskedasticity (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2008-04
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 (16)

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Related works:
Journal Article: Does Monetary Policy React to Asset Prices? Some International Evidence (2011)
Working Paper: Does monetary policy react to asset prices? Some international evidence (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:08.02

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