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Has the Fed Reacted Asymmetrically to Stock Prices?

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  • Ravn Søren Hove

    (University of Copenhagen and Danmarks Nationalbank)

Abstract

This paper presents an empirical study of a potential asymmetry in the response of monetary policy to stock prices in the US. The main finding is that while monetary policy reacts significantly to stock price drops, no significant reaction to stock price increases is found. This result is obtained by applying the method of identification through heteroskedasticity to a daily dataset covering the period 1998-2008. The result is confirmed in an estimated, augmented Taylor rule based on monthly data for the same period. The size of the estimated, asymmetric reaction is modest.The study constitutes an empirical contribution to the debate about the role of asset prices in monetary policy, which has seen a revival in the aftermath of the crisis. In particular, the results lend empirical support to recent claims that the pre-crisis approach to monetary policy implied an asymmetric policy stance towards stock price movements.

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  • Ravn Søren Hove, 2012. "Has the Fed Reacted Asymmetrically to Stock Prices?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, June.
  • Handle: RePEc:bpj:bejmac:v:12:y:2012:i:1:n:14
    DOI: 10.1515/1935-1690.2452
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    2. Milani, Fabio, 2017. "Learning about the interdependence between the macroeconomy and the stock market," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 223-242.
    3. Aerdt Houben & Jan Kakes, 2013. "Financial imbalances and macroprudential policy in a currency union," DNB Occasional Studies 1105, Netherlands Central Bank, Research Department.
    4. Knut Are Aastveit & Francesco Furlanetto & Francesca Loria, 2017. "Has the Fed responded to house and stock prices? A time-varying analysis," Working Papers 1713, Banco de España.
    5. Rory O'Farrell & Lukasz Rawdanowicz, 2017. "Monetary policy and inequality: Financial channels," International Finance, Wiley Blackwell, vol. 20(2), pages 174-188, June.
    6. Christophe Blot & Paul Hubert & Fabien Labondance, 2020. "The asymmetric effects of monetary policy on stock price bubbles," Documents de Travail de l'OFCE 2020-12, Observatoire Francais des Conjonctures Economiques (OFCE).
    7. Andrew Filardo & Paul Hubert & Phurichai Rungcharoenkitkul, 2019. "The reaction function channel of monetary policy and the financial cycle," Sciences Po publications 16, Sciences Po.
    8. Anna Cieslak & Annette Vissing-Jorgensen, 2020. "The Economics of the Fed Put," NBER Working Papers 26894, National Bureau of Economic Research, Inc.
    9. Francesco Furlanetto, 2011. "Does Monetary Policy React to Asset Prices? Some International Evidence," International Journal of Central Banking, International Journal of Central Banking, vol. 7(3), pages 91-111, September.
    10. Siemroth, Christoph, 2019. "The informational content of prices when policy makers react to financial markets," Journal of Economic Theory, Elsevier, vol. 179(C), pages 240-274.
    11. Palma, Nuno, 2013. "Did Greenspan Open Pandora's Box? Testing the Taylor Hypothesis and Beyond," MPRA Paper 48197, University Library of Munich, Germany.
    12. Boris Hofmann & Bilyana Bogdanova, 2012. "Taylor rules and monetary policy: a global "Great Deviation"?," BIS Quarterly Review, Bank for International Settlements, September.
    13. Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Truger, Achim & Wieland, Volker, 2019. "Den Strukturwandel meistern. Jahresgutachten 2019/20," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201920.
    14. Ravn, Søren Hove, 2014. "Asymmetric monetary policy towards the stock market: A DSGE approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 24-41.
    15. Pedro S. Amaral, 2017. "Monetary Policy and Inequality," Economic Commentary, Federal Reserve Bank of Cleveland, issue January.

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