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Has the Fed Reacted Asymmetrically to Stock Prices

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  • Søren HOVE RAVN

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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  • Søren HOVE RAVN, "undated". "Has the Fed Reacted Asymmetrically to Stock Prices," EcoMod2010 259600076, EcoMod.
  • Handle: RePEc:ekd:002596:259600076
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    Cited by:

    1. Aerdt Houben & Jan Kakes, 2013. "Financial imbalances and macroprudential policy in a currency union," DNB Occasional Studies 1105, Netherlands Central Bank, Research Department.
    2. repec:eee:reveco:v:49:y:2017:i:c:p:223-242 is not listed on IDEAS
    3. 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.
    4. Knut Are Aastveit & Francesco Furlanetto & Francesca Loria, 2017. "Has the Fed responded to house and stock prices? A time-varying analysis," Working Paper 2017/1, Norges Bank.
    5. Ravn, Søren Hove, 2014. "Asymmetric monetary policy towards the stock market: A DSGE approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 24-41.
    6. 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.
    7. repec:bla:intfin:v:20:y:2017:i:2:p:174-188 is not listed on IDEAS
    8. Palma, Nuno, 2013. "Did Greenspan Open Pandora's Box? Testing the Taylor Hypothesis and Beyond," MPRA Paper 48197, University Library of Munich, Germany.
    9. Boris Hofmann & Bilyana Bogdanova, 2012. "Taylor rules and monetary policy: a global "Great Deviation"?," BIS Quarterly Review, Bank for International Settlements, September.
    10. Amaral, Pedro S., 2017. "Monetary Policy and Inequality," Economic Commentary, Federal Reserve Bank of Cleveland, issue January.

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