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Has the Fed responded to house and stock prices? A time-varying analysis

Author

Listed:
  • Knut Are Aastveit

    () (NORGES BANK)

  • Francesco Furlanetto

    () (NORGES BANK)

  • Francesca Loria

    () (EUROPEAN UNIVERSITY INSTITUTE)

Abstract

In this paper we use a structural VAR model with time-varying parameters and stochastic volatility to investigate whether the Federal Reserve has responded systematically to asset prices and whether this response has changed over time. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices and stock prices. We find some time variation in the coefficients for house prices and stock prices but fairly stable coefficients over time for inflation and the output gap. Our results indicate that the systematic component of monetary policy in the US, i) attached a positive weight to real house price growth but lowered it prior to the crisis and eventually raised it again, and ii) only episodically took real stock price growth into account.

Suggested Citation

  • 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;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1713
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    References listed on IDEAS

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    1. Cosmin Ilut & Lawrence J. Christiano & Massimo Rostagno & Roberto Motto, 2010. "Monetary policy and stock market booms," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 85-145.
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    Cited by:

    1. Imran Hussain Shaha & Simón Sosvilla-Rivero, 2017. "Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices," Working Papers del Instituto Complutense de Estudios Internacionales 1707, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
    2. repec:ire:issued:v:22:n:01:2019:p:27-59 is not listed on IDEAS
    3. I-Chun Tsai & Che-Chun Lin, 2019. "Variations and Influences of Connectedness among US Housing Markets," International Real Estate Review, Asian Real Estate Society, vol. 22(1), pages 27-58.

    More about this item

    Keywords

    Bayesian VAR; time-varying parameters; monetary policy; house prices; stock market.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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