IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Did the Fed and ECB react asymmetrically with respect to asset market developments?

  • Hoffmann, Andreas

This paper studies the monetary policy of the Federal Reserve (Fed) and the European Central Bank (ECB) with respect to stock or/and foreign exchange markets from 1979 to 2009. I find that during the Greenspan era stock markets played a role in US monetary policy. The Fed lowered interest rates when stock prices fell, but did not raise interest rates in response to rising stock prices. This asymmetry put a downward pressure on interest rates. For the ECB, the exchange rate to the dollar played a role in monetary policy decisions. While I do not find evidence of asymmetric monetary policy with respect to the stock market, the ECB may be argued to have indirectly followed the asymmetric US monetary policy via the exchange rate channel until 2006, the period until which the dollar depreciated heavily against the euro. With asset markets putting a downward pressure on interest rates, it is likely that the Fed and ECB contributed to recent boom-and-bust cycles by providing low-cost liquidity to flourishing markets. Relevance and implications of the findings are discussed.

If 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.

File URL: http://www.sciencedirect.com/science/article/pii/S0161893812001147
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 35 (2013)
Issue (Month): 2 ()
Pages: 197-211

as
in new window

Handle: RePEc:eee:jpolmo:v:35:y:2013:i:2:p:197-211
DOI: 10.1016/j.jpolmod.2012.09.005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505735

References listed on IDEAS
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.:

as in new window
  1. Ansgar Belke & Walter Orth & Ralph Setzer, 2009. "Liquidity and the Dynamic Pattern of Asset Price Adjustment: A Global View," Discussion Papers of DIW Berlin 933, DIW Berlin, German Institute for Economic Research.
  2. Fernandez, Adriana Z. & Koenig, Evan F. & Nikolsko-Rzhevskyy, Alex, 2010. "Can alternative Taylor-rule specifications describe Federal Reserve policy decisions?," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 733-757, November.
  3. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  4. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  5. Issing, Otmar, 2005. "The ECB and the euro--the first 6 years: A view from the ECB," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 405-420, June.
  6. DANNE, Christian & SCHNABL, Gunther, 2008. "A role model for China? Exchange rate flexibility and monetary policy in Japan," China Economic Review, Elsevier, vol. 19(2), pages 183-196, June.
  7. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
  8. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
  9. Siklos, Pierre L. & Werner, Thomas & Bohl, Martin T., 2004. "Asset Prices in Taylor Rules: Specification, Estimation, and Policy Implications for the ECB," Discussion Paper Series 1: Economic Studies 2004,22, Deutsche Bundesbank, Research Centre.
  10. Ansgar Belke & Thorsten Polleit, 2006. "How the ECB and the US Fed Set Interest Rates," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 269/2006, Department of Economics, University of Hohenheim, Germany.
  11. Ronald McKinnon, 2010. "Rehabilitating the unloved dollar standard," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 24(2), pages 1-18, November.
  12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  13. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
  14. repec:pri:cepsud:114blinderreis is not listed on IDEAS
  15. Fourcans, Andre & Vranceanu, Radu, 2007. "The ECB monetary policy: Choices and challenges," Journal of Policy Modeling, Elsevier, vol. 29(2), pages 181-194.
  16. Carmen M. Reinhart & M. Belen Sbrancia, 2011. "The Liquidation of Government Debt," BIS Working Papers 363, Bank for International Settlements.
  17. Schnabl, Gunther & Hoffmann, Andreas, 2007. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets - An Overinvestment View," MPRA Paper 5201, University Library of Munich, Germany.
  18. Hoffmann, Andreas & Schnabl, Gunther, 2009. "A Vicious Cycle of Manias, Crashes and Asymmetric Policy Responses - An Overinvestment View," MPRA Paper 18532, University Library of Munich, Germany.
  19. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Finance and Economics Discussion Series 2007-40, Board of Governors of the Federal Reserve System (U.S.).
  20. Alan S. Blinder & Ricardo Reis, 2005. "Understanding the Greenspan standard," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 11-96.
  21. Bill Dupor & Timothy Conley, 2004. "The Fed Response to Equity Prices and Inflation," American Economic Review, American Economic Association, vol. 94(2), pages 24-28, May.
  22. Botzen, W.J. Wouter & Marey, Philip S., 2010. "Did the ECB respond to the stock market before the crisis?," Journal of Policy Modeling, Elsevier, vol. 32(3), pages 303-322, May.
  23. repec:cto:journl:v:21:y:2001:i:2:p:177-182 is not listed on IDEAS
  24. Belke, Ansgar & Orth, Walter & Setzer, Ralph, 2008. "Liquidity and the dynamic pattern of price adjustment: a global view," Discussion Paper Series 1: Economic Studies 2008,25, Deutsche Bundesbank, Research Centre.
  25. Bohl, Martin T. & Siklos, Pierre L. & Werner, Thomas, 2007. "Do central banks react to the stock market? The case of the Bundesbank," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 719-733, March.
  26. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction of Monetary Policy to the Stock Market," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 639-669.
  27. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  28. Martin T. Bohl & Pierre L. Siklos & David Sondermann, 2008. "European Stock Markets and the ECB's Monetary Policy Surprises," International Finance, Wiley Blackwell, vol. 11(2), pages 117-130, 08.
  29. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
  30. 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.
  31. Andrew J. Filardo, 2001. "Should monetary policy respond to asset price bubbles? : some experimental results," Research Working Paper RWP 01-04, Federal Reserve Bank of Kansas City.
  32. Greiber, Claus & Setzer, Ralph, 2007. "Money and housing: evidence for the euro area and the US," Discussion Paper Series 1: Economic Studies 2007,12, Deutsche Bundesbank, Research Centre.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:35:y:2013:i:2:p:197-211. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.