Can geography lock a society in stagnation?
Yes. By using real-time structure break monitoring techniques we find evidence against monotonic response pattern, specifically three response structures of US stock market to the federal monetary policy actions based on a sample from 1989-2010. We re-estimate the market response in each of the three structures and find results stronger than previously documented especially in 2001-2008. We propose a â€œFedGapâ€ variable which measures the deviation of Fed policy from the â€œTaylor Ruleâ€ in explanation and find it to be significant with economic meaning. We conclude that market responses proportionally to the size of the FedGap and it thus serves as a new â€œmacro-stateâ€ factor which can explain the dynamic response patterns of financial markets. We also examine the issue from the bond market, and find similar results.
|Date of creation:||04 Jul 2013|
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