Identifying the Interdependence Between Us Monetary Policy and the Stock Market

Arbeitspapier

We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (Christiano et al., 1999). We find great interdependence between interest rate setting and real stock prices. Real stock prices immediately fall by 7-9 percent due to a monetary policy shock that raises the federal funds rate by 100 basis points. A stock price shock increasing real stock prices by one percent leads to an increase in the interest rate of close to 4 basis points.

Object Details

• ISBN: 978-82-7553-431-4
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2008/4

Classification and Topics

• Classification: Wirtschaft ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Monetary Policy ; Interest Rates: Determination, Term Structure, and Effects
• Subject: VAR ; monetary policy ; asset prices ; identification

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bjørnland, Hilde C. ; Leitemo, Kai
• Event: Veröffentlichung
• (who): Norges Bank
• (where): Oslo
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/209895
• Last update: 10.03.2025, 11:41 AM CET