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.
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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)
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