U.S. Monetary Policy and Stock Prices: Should the Fed Attempt to Control Stock Prices?

John Tatom

No 2009-WP-14, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: This article rejects the linkages in proposals that the Federal Reserve Bank (Fed) target equity prices. The real federal funds rate (RFF) and stock prices (SP) are uncorrelated; causality tests show a positive effect of SP on RFF and a negative effect of SP on RFF. These results occur as part of the dynamics of a negative cointegrated relationship between SP and RFF. A theoretically expected inverse relation between SP and inflation accounts for the results. The negative effect of SP on FF is also confirmed in a Taylor Rule estimate. Higher stock prices anticipate lower, not higher, inflation.

Keywords: Monetary Policy; Bubbles; Asset Prices; Inflation (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 G12 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2009-12
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Working Paper: U.S. Monetary Policy and Stock Prices: Should the Fed Attempt to Control Stock Prices? (2009)
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