Stock Market Uncertainty and Monetary Policy Reaction Functions of the Federal Reserve Bank
AbstractIn this paper, we examine the link between stock market uncertainty and monetary policy in the U.S. There are strong arguments as to why central banks should account for stock market uncertainty in their strategies. Amongst others, they can maintain the functioning of financial markets and moderate economic downswings. To describe the behavior of the Federal Reserve Bank, augmented forward-looking Taylor rules are estimated by GMM. The standard specification is expanded by measures of stock market uncertainty. We show that given certain levels of inflation and output, U.S. central bank rates are significantly lower when stock market uncertainty is high and vice versa. This result is valid for all tested measures of financial uncertainty.
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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.
Volume (Year): 10 (2010)
Issue (Month): 1 (July)
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Web page: http://www.degruyter.com
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- Ruediger Bachmann & Benjamin Born & Steffen Elstner & Christian Grimme, 2013.
"Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy,"
NBER Working Papers
19180, National Bureau of Economic Research, Inc.
- Bachmann, Rüdiger & Born, Benjamin & Elstner, Steffen & Grimme, Christian, 2013. "Time-varying business volatility, price setting, and the real effects of monetary policy," Working Papers 01/2013, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
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