IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Beatrice D. Simo-Kengne

    (University of Pretoria)

  • Stephen M. Miller

    (University of Nevada, Las Vegas and University of Connecticut)

  • Rangan Gupta

    (University of Pretoria)

This paper investigates whether changes in the monetary transmission mechanism as captured by the interest rate respond to variations in asset returns. We distinguish between low-volatility (bull) and high-volatility (bear) markets and employ a TVP-VAR approach with stochastic volatility to assess the evolution of the interest rate in relation to housing and stock returns. We measure the relative importance of housing and stock returns in the movements of the interest rate 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 the interest rate responds more strongly to asset returns during low-volatility (bull) regimes. While the bigger interest-rate effect of stock-return shocks occurs prior to the 1970s, the interest rate appears to respond more strongly to housing-return than stock return shocks after the 1970s. Similarly, a higher interest rate exerts a larger effect on both asset categories during low-volatility (bull) markets. Particularly, larger negative responses of housing return to interest-rate shocks occur after the 1980s, corresponding to the low-volatility (bull) regime in the housing market. Conversely, the stock-return effect of interest-rate shocks dominates before the 1980s, where stock-market booms achieved more importance.

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://web2.uconn.edu/economics/working/2013-20R.pdf
File Function: Full text (revised version)
Download Restriction: no

File URL: http://web2.uconn.edu/economics/working/2013-20.pdf
File Function: Full text (original version)
Download Restriction: no

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2013-20.

as
in new window

Length: 29 pages
Date of creation: Aug 2013
Date of revision: Dec 2013
Handle: RePEc:uct:uconnp:2013-20
Note: Stephen M. Miller is corresponding author.
Contact details of provider: Postal: University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
More information through EDIRC

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. Mohamed Arouri & Aviral Kumar Tiwari & Arif Billah Dar & Niyati Bhanja & FrédéricTeulon, 2014. "Stock returns and Inflation in Pakistan," Working Papers 2014-108, Department of Research, Ipag Business School.
  2. Zheng Liu & Pengfei Wang & Tao Zha, 2011. "Land-price dynamics and macroeconomic fluctuations," Working Paper 2011-11, Federal Reserve Bank of Atlanta.
  3. Rangan Gupta & Stephen M. Miller & Dylan van Wyk, 2010. "Financial Market Liberalization, Monetary Policy, and Housing Price Dynamics," Working papers 2010-06, University of Connecticut, Department of Economics.
  4. Boivin, Jean, 2006. "Has U.S. Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1149-1173, August.
  5. Tsangyao Chang & Wen-Yi Chen & Rangan Gupta & Duc Khuong Nguyen, 2013. "Are Stock Prices Related to Political Uncertainty Index in OECD Countries? Evidence from Bootstrap Panel Causality Test," Working Papers 2013-036, Department of Research, Ipag Business School.
  6. Stelios Bekiros & Alessia Paccagnini, 2014. "Forecasting the US Economy with a Factor-Augmented Vector Autoregressive DSGE model," Working Papers 2014-183, Department of Research, Ipag Business School.
  7. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
  8. Mohamed Arouri & Duc Khuong Nguyen & Kuntara Pukthuanthong, 2014. "Diversification benefits and strategic portfolio allocation across asset classes: The case of the US markets," Working Papers 2014-294, Department of Research, Ipag Business School.
  9. Stephen M. Miller & Luis F. Martins & Rangan Gupta, 2014. "A Time-Varying Approach of the US Welfare Cost of Inflation," Working papers 2014-11, University of Connecticut, Department of Economics.
  10. Olivier Jeanne & Michael D. Bordo, 2002. "Monetary Policy and Asset Prices; Does "Benign Neglect" Make Sense?," IMF Working Papers 02/225, International Monetary Fund.
  11. Michael D. Bordo & David C. Wheelock, 2004. "Monetary policy and asset prices: a look back at past U.S. stock market booms," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 19-44.
  12. Margaret M. McConnell & Gabriel Perez Quiros, 1998. "Output fluctuations in the United States: what has changed since the early 1980s?," Staff Reports 41, Federal Reserve Bank of New York.
  13. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  14. Candelon Bertrand & Ahmed Jameel & Straetmans Stefan, 2012. "Predicting and Capitalizing on Stock Market Bears in the U.S," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  15. Shawkat Hammoudeh & Duc Khuong Nguyen & Ricardo M. Sousa, 2014. "US Monetary Policy and Commodity Sector Prices," Working Papers 2014-438, Department of Research, Ipag Business School.
  16. Michael D. Bordo & Michael J. Dueker & David C. Wheelock, 2000. "Aggregate Price Shocks and Financial Instability: An Historical Analysis," NBER Working Papers 7652, National Bureau of Economic Research, Inc.
  17. Koop, Gary & Leon-Gonzalez, Roberto & Strachan, Rodney W., 2009. "On the evolution of the monetary policy transmission mechanism," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 997-1017, April.
  18. I.Fatnassi & S.Chawechi & Zied Ftiti & A.Ben Maatoug, 2014. "Effects of Monetary Policy on the REIT Returns - Evidence from the United Kingdom," Working Papers 2014-063, Department of Research, Ipag Business School.
  19. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
  20. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  21. Furkan Emirmahmutoglu & Mehmet Balcilar & Nicholas Apergis & Beatrice D. Simo-Kengne & Tsangyao Chang & Rangan Gupta, 2014. "Causal relationship between asset prices and output in the US: Evidence from state-level panel Granger causality test," Working Papers 201411, University of Pretoria, Department of Economics.
  22. Rangan Gupta & Shawkat Hammoudeh & Mampho P. Modise & Duc Khuong Nguyen, 2013. "Can Economic Uncertainty, Financial Stress and Consumer Sentiments Predict U.S. Equity Premium?," Working Papers 2013-020, Department of Research, Ipag Business School.
  23. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2013. "Wealth Effects Revisited 1975-2012," Critical Finance Review, now publishers, vol. 2(1), pages 101-128, July.
  24. Jouchi Nakajima, 2011. "Time-Varying Parameter VAR Model with Stochastic Volatility: An Overview of Methodology and Empirical Applications," IMES Discussion Paper Series 11-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  25. Gelain, Paolo & Lansing, Kevin J., 2014. "House prices, expectations, and time-varying fundamentals," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 3-25.
  26. Luca Guerrieri & Matteo Iacoviello, 2013. "Collateral constraints and macroeconomic asymmetries," International Finance Discussion Papers 1082, Board of Governors of the Federal Reserve System (U.S.).
  27. Donald L. Kohn, 2009. "Monetary Policy and Asset Prices Revisited," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 31-44, Winter.
  28. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
  29. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  30. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  31. Thomas Lubik & Frank Schorfheide, 2002. "Testing for Indeterminacy:An Application to U.S. Monetary Policy," Economics Working Paper Archive 480, The Johns Hopkins University,Department of Economics, revised Jun 2003.
  32. Ann-Marie Meulendyke, 1998. "U.S. monetary policy and financial markets," Monograph, Federal Reserve Bank of New York, number 1998mpaf.
  33. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  34. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  35. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  36. Bordo, Michael D. & Dueker, Michael J. & Wheelock, David C., 2003. "Aggregate price shocks and financial stability: the United Kingdom 1796-1999," Explorations in Economic History, Elsevier, vol. 40(2), pages 143-169, April.
  37. Vasilios Plakandaras & Rangan Gupta & Periklis Gogas & Theophilos Papadimitriou, 2014. "Forecasting the U.S. Real House Price Index," Working Papers 201418, University of Pretoria, Department of Economics.
  38. Frederic S. Mishkin, 2001. "The Transmission Mechanism and the Role of Asset Prices in Monetary Policy," NBER Working Papers 8617, National Bureau of Economic Research, Inc.
  39. Bhar, Ramaprasad & Hamori, Shigeyuki, 2003. "Alternative characterization of the volatility in the growth rate of real GDP," Japan and the World Economy, Elsevier, vol. 15(2), pages 223-231, April.
  40. Goodness C. Aye & Stephen M. Miller & Rangan Gupta & Mehmet Balcilar, 2014. "Forecasting US Real Private Residential Fixed Investment Using a Large Number of Predictors," Working Papers 2014-465, Department of Research, Ipag Business School.
  41. Markus Demary, 2010. "The interplay between output, inflation, interest rates and house prices: international evidence," Journal of Property Research, Taylor & Francis Journals, vol. 27(1), pages 1-17, April.
  42. Aurelie SANNAJUST, 2014. "Impact of the World Financial Crisis to SMEs: The determinants of bank loan rejection in Europe and USA," Working Papers 2014-327, Department of Research, Ipag Business School.
  43. Dimitris Korobilis, 2013. "Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models-super-," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(2), pages 157-179, 04.
  44. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
  45. Heni Boubaker & Nadia Sghaier, 2014. "On the dynamic dependence between US and other developed stock markets: An extreme-value time-varying copula approach," Working Papers 2014-094, Department of Research, Ipag Business School.
  46. Terence C. Mills & Ping Wang, 2003. "Have output growth rates stabilised? evidence from the g-7 economies," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(3), pages 232-246, 08.
  47. Shawkat Hammoudeh & Duc Khuong Nguyen & Ricardo M. Sousa, 2014. "China’s Monetary Policy and Commodity Prices," Working Papers 2014-298, Department of Research, Ipag Business School.
  48. Simo-Kengne, Beatrice D. & Balcilar, Mehmet & Gupta, Rangan & Reid, Monique & Aye, Goodness C., 2013. "Is the relationship between monetary policy and house prices asymmetric across bull and bear markets in South Africa? Evidence from a Markov-switching vector autoregressive model," Economic Modelling, Elsevier, vol. 32(C), pages 161-171.
  49. Vittorio Peretti & Rangan Gupta & Roula Inglesi-Lotz, 2012. "Do House Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers 201216, University of Pretoria, Department of Economics.
  50. Jean Messiha & Bruno-Laurent Moschetto & Frederic Teulon, 2014. "How to switch off the cypriot financial crisis without weakening durably Europe ?," Working Papers 2014-169, Department of Research, Ipag Business School.
  51. KABLAN, Sandrine, 2012. "Microfinance efficiency in the West African Economic and Monetary Union: have reforms promoted sustainability or outreach?," MPRA Paper 39955, University Library of Munich, Germany.
  52. Peter M. Summers, 2005. "What caused the Great Moderation? : some cross-country evidence," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32.
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:uct:uconnp:2013-20. 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: (Francis Ahking)

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.