Stock Market Uncertainty and Monetary Policy Reaction Functions of the Federal Reserve Bank

Arbeitspapier

In this paper we examine the link between stock market uncertainty and monetary policy in the US. There are strong arguments why central banks should account for stock market uncertainty in their strategy. Amongst others, they can maintain the functioning of financial markets and moderate possible economic downswings. To describe the behavior of the Federal Reserve Bank, augmented forward-looking Taylor rules are estimated by GMM. The standard specification is expanded by a measure for stock market uncertainty, which is estimated by an exponential GARCH-model. We show that, given a certain level of inflation and output, US central bank rates are significantly lower when stock market uncertainty is high and vice versa. These results are achieved by using the federal funds rate from 1980:10 to 2007:7.

Object Details

• ISBN: 978-3-86788-083-1
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Ruhr Economic Papers ; No. 77

Classification and Topics

• Classification: Wirtschaft ; Central Banks and Their Policies ; Financial Crises
• Subject: Monetary policy rules ; financial markets ; stock market uncertainty ; EGARCH ; Aktienmarkt ; Risiko ; Geldpolitik ; Reaktionsfunktion ; Taylor-Regel ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Jovanović, Mario ; Zimmermann, Tobias
• Event: Veröffentlichung
• (who): Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI)
• (where): Essen
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/26843
• Last update: 10.03.2025, 11:42 AM CET