Eyes on the prize: how did the Fed respond to the stock market?
AbstractThe appropriate role for equity prices in monetary policy deliberations has been hotly debated for some time. Recent work suggests that equity prices have affected monetary policy decisions above and beyond their indirect effect on the traditional goal variables of the FOMC. However, the correlation between stock price movements and these other goal variables has made the identification of the equity price effect problematic. Previous studies have used a forecast that embodies a different information set from the one used by the FOMC, which could bias the estimated coefficient on equity prices. The authors show that, in fact, the methods used in the earlier literature fail to adequately disentangle the observational equivalence problem. The authors then show that after controlling for the information that actually enters the FOMC’s decision-making process, equity prices have had no independent effect on monetary policy.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 04-2.
Date of creation: 2004
Date of revision:
Other versions of this item:
- Fuhrer, Jeff & Tootell, Geoff, 2008. "Eyes on the prize: How did the fed respond to the stock market?," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 796-805, May.
- NEP-ALL-2004-09-05 (All new papers)
- NEP-CBA-2004-09-05 (Central Banking)
- NEP-FIN-2004-09-05 (Finance)
- NEP-FMK-2004-09-05 (Financial Markets)
- NEP-MAC-2004-09-05 (Macroeconomics)
- NEP-MON-2004-09-10 (Monetary Economics)
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