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Evolution of Monetary Policy in the US: The Role of Asset Prices

  • Beatrice D. Simo-Kengne


    (Department of Economics, University of Pretoria)

  • Stephen M. Miller


    (College of Business, University of Las Vegas, Nevada)

  • Rangan Gupta


    (Department of Economics, University of Pretoria)

This paper investigates whether changes in monetary transmission mechanism respond to variations in asset prices. We distinguish between bull and bear markets and employ a TVP-VAR approach with stochastic volatility to assess the evolution of the monetary policy in relation to housing and stock prices. We measure the relative importance of housing and stock prices in the conduct of monetary policy and their possible feedback effects over both time and horizon and across regimes. Empirical results from annual data on the US spanning the period from 1890 to 2012 indicate that monetary policy responds more strongly to asset prices during bull regimes. While the bigger monetary effect of stock price shocks occurs prior to the 1970s, monetary policy appears to respond more strongly to housing price than stock price shocks after the 1970s. Similarly, contractionary monetary policy exerts a larger effect on both asset categories during bull markets. Particularly, larger negative responses of house prices to monetary policy shocks occur after the 1980s, corresponding to the bull regime in the housing market. Conversely, the stock-price effect of monetary policy shocks dominates before the 1980s, where stock-market booms achieved more importance.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201343.

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Length: 28 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:pre:wpaper:201343
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