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In search of robust monetary policy rules - Should the Fed look at money growth or stock market performance?

  • Mandler, Martin

This paper studies whether monetary policy should respond to changes in monetary aggregates or stock market indices. Based on an empirical model of the US it presents estimates of how the inclusion of monetary aggregates or stock market indices in the central bank's information set affects the stabilization performance of an optimal monetary policy rule. It is shown that accounting for uncertainty about the structural relationships within the economy leads to a strong deterioration in the stabilization success of monetary policy reaction functions that respond to the growth rates of monetary aggregates or stock market indices. In addition it is analyzed whether money growth or changes in stock market indices help to explain US monetary policy in the recent years.

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File URL: http://www.sciencedirect.com/science/article/pii/S0164-0704(08)00059-1
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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 31 (2009)
Issue (Month): 2 (June)
Pages: 345-361

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Handle: RePEc:eee:jmacro:v:31:y:2009:i:2:p:345-361
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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