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Monetary Policy and the U.S. Stock Market

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  • Marc D. Hayford
  • A. G. Malliaris

Abstract

What is the influence of stock market valuations on monetary policy? We use a forward-looking Taylor rule model to examine if monetary policy since the 19 October 1987 stock market crash has been influenced by the valuation of the stock market. We estimate the model using revised and real-time data and find no empirical evidence that the Federal Reserve policy attempted to moderate stock market valuations during the late 1990s despite the "irrational exuberance" comments by Chairman Greenspan. Actually, the empirical evidence suggests that the Fed accommodated the high valuations of the stock market during this period. (JEL E52, G12) Copyright 2004, Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 42 (2004)
Issue (Month): 3 (July)
Pages: 387-401

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Handle: RePEc:oup:ecinqu:v:42:y:2004:i:3:p:387-401

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Cited by:
  1. Vicente da Gama Machado, 2012. "Monetary Policy, Asset Prices and Adaptive Learning," Working Papers Series 274, Central Bank of Brazil, Research Department.
  2. Michael D. Bordo & Michael J. Dueker & David C. Wheelock, 2009. "Inflation, monetary policy and stock market conditions: quantitative evidence from a hybrid latent-variable VAR," Working Papers 2008-012, Federal Reserve Bank of St. Louis.
  3. Michael D. Bordo & David C. Wheelock, 2004. "Monetary policy and asset prices: a look back at past U.S. stock market booms," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 19-44.
  4. Aleksandar Murdzhev & Marc Tomljanovich, 2006. "What Color is Alan Greenspan's Tie? How Central Bank Policy Announcements Have Changed Financial Markets," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 571-593, Fall.
  5. Pereda, Javier, 2012. "Price – Earnings Ratio for the Lima Stock Exchange: Issues and Applications," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 17(32), pages 41-52.
  6. Laopodis, Nikiforos T., 2013. "Monetary policy and stock market dynamics across monetary regimes," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 381-406.
  7. Anastasios G. Malliaris & Ramaprasad Bhar, 2011. "Dividends, Momentum, and Macroeconomic Variables as Determinants of the US Equity Premium Across Economic Regimes," Review of Behavioral Finance, Emerald Group Publishing, vol. 3(1), pages 27-53, September.
  8. Fernando Alexandre & Pedro Bação, 2005. "Monetary policy and asset prices: the investment channel," NIPE Working Papers 3/2005, NIPE - Universidade do Minho.
  9. Francesco, Guidi, 2008. "European Central Bank and Federal Reserve USA: monetary policy effects on the returns volatility of the Italian Stock Market Index Mibtel," MPRA Paper 10759, University Library of Munich, Germany.
  10. Nikiforos Laopodis, 2010. "Dynamic linkages between monetary policy and the stock market," Review of Quantitative Finance and Accounting, Springer, vol. 35(3), pages 271-293, October.
  11. Michael D. Bordo & Michael J. Dueker & David C. Wheelock, 2008. "Inflation, Monetary Policy and Stock Market Conditions," NBER Working Papers 14019, National Bureau of Economic Research, Inc.
  12. Stefanescu, Razvan & Dumitriu, Ramona, 2010. "Impact of the global crisis on the linkages between the interest rates and the stock prices in Romania," MPRA Paper 36716, University Library of Munich, Germany, revised 16 Feb 2011.

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