Inflation, monetary policy and stock market conditions: quantitative evidence from a hybrid latent-variable VAR
AbstractThis paper examines the association between inflation, monetary policy and U.S. stock market conditions during the second half of the 20th century. We use a latent-variable VAR to estimate the impact of inflation and other macroeconomic shocks on a latent index of stock market conditions. Our objective is to investigate the extent to which various shocks contribute to changes in market conditions, above and beyond their direct effects on real stock prices. We find that disinflation shocks promote market booms and inflation shocks contribute to busts. Further, we find that inflation shocks can explain more of the variation in real stock prices when stock market conditions are taken into account.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-012.
Date of creation: 2009
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-17 (All new papers)
- NEP-CBA-2008-05-17 (Central Banking)
- NEP-HIS-2008-05-17 (Business, Economic & Financial History)
- NEP-MAC-2008-05-17 (Macroeconomics)
- NEP-MON-2008-05-17 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996.
"The twin crises: the causes of banking and balance-of-payments problems,"
International Finance Discussion Papers
544, Board of Governors of the Federal Reserve System (U.S.).
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
- Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
- Ben S. Bernanke & Kenneth N. Kuttner, 2005.
"What Explains the Stock Market's Reaction to Federal Reserve Policy?,"
Journal of Finance,
American Finance Association, vol. 60(3), pages 1221-1257, 06.
- Ben Bernanke & Kenneth N. Kuttner, 2003. "What explains the stock market's reaction to Federal Reserve policy?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," NBER Working Papers 10402, National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What explains the stock market's reaction to Federal Reserve policy?," Finance and Economics Discussion Series 2004-16, Board of Governors of the Federal Reserve System (U.S.).
- Ben S. Bernanke & Kenneth N. Kuttner, 2003. "What explains the stock market's reaction to Federal Reserve policy?," Staff Reports 174, Federal Reserve Bank of New York.
- Rapach, David E., 2001. "Macro shocks and real stock prices," Journal of Economics and Business, Elsevier, vol. 53(1), pages 5-26.
- Lee, Bong-Soo, 1992. " Causal Relations among Stock Returns, Interest Rates, Real Activity, and Inflation," Journal of Finance, American Finance Association, vol. 47(4), pages 1591-603, September.
- Adrian R. Pagan & Kirill A. Sossounov, 2003. "A simple framework for analysing bull and bear markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 23-46.
- Shiu-Sheng Chen, 2007.
"Does Monetary Policy Have Asymmetric Effects on Stock Returns?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 39(2-3), pages 667-688, 03.
- Shiu-Sheng Chen, 2005. "Does Monetary Policy Have Asymmetric Effects on Stock Returns?," Macroeconomics 0502001, EconWPA, revised 01 Feb 2005.
- Marc D. Hayford & A. G. Malliaris, 2004. "Monetary Policy and the U.S. Stock Market," Economic Inquiry, Western Economic Association International, vol. 42(3), pages 387-401, July.
- Roberto Rigobon & Brian Sack, 2003.
"Measuring The Reaction Of Monetary Policy To The Stock Market,"
The Quarterly Journal of Economics,
MIT Press, vol. 118(2), pages 639-669, May.
- Roberto Rigobon & Brian Sack, 2001. "Measuring the reaction of monetary policy to the stock market," Finance and Economics Discussion Series 2001-14, Board of Governors of the Federal Reserve System (U.S.).
- Roberto Rigobon & Brian Sack, 2001. "Measuring the Reaction of Monetary Policy to the Stock Market," NBER Working Papers 8350, National Bureau of Economic Research, Inc.
- Michael Dueker & Charles Nelson, 2006.
"Business-Cycle Filtering of Macroeconomic Data Via A Latent Business-Cycle Index,"
UWEC-2006-13-P, University of Washington, Department of Economics.
- Dueker, Michael & Nelson, Charles R., 2006. "Business-Cycle Filtering Of Macroeconomic Data Via A Latent Business-Cycle Index," Macroeconomic Dynamics, Cambridge University Press, vol. 10(05), pages 573-594, November.
- Michael Dueker, 2005.
"Dynamic Forecasts of Qualitative Variables: A Qual VAR Model of U.S. Recessions,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 23, pages 96-104, January.
- Tom Doan, . "RATS programs to replicate Dueker(2005) JBES dynamic probit model," Statistical Software Components RTZ00049, Boston College Department of Economics.
- Michael J. Dueker, 2003. "Dynamic forecasts of qualitative variables: a Qual VAR model of U.S. recessions," Working Papers 2001-012, Federal Reserve Bank of St. Louis.
- He, Ling T., 2006. "Variations in effects of monetary policy on stock market returns in the past four decades," Review of Financial Economics, Elsevier, vol. 15(4), pages 331-349.
- Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- Rapach, David E., 2002. "The long-run relationship between inflation and real stock prices," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 331-351, September.
- Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
- Don Harding & Adrian Pagan, 2006. "The Econometric Analysis of Constructed Binary Time Series," Department of Economics - Working Papers Series 963, The University of Melbourne.
- Michael D. Bordo & David C. Wheelock, 2007. "Stock market booms and monetary policy in the twentieth century," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 91-122.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).
If references are entirely missing, you can add them using this form.