Identifying the interdependence between US monetary policy and the stock market

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Title: Identifying the interdependence between US monetary policy and the stock market
ISBN: 952-462-225-6
Author: Bjørnland, Hilde C. ; Leitemo, Kai
Organization: Suomen Pankki
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2005
Series number: 17/2005
Year of publication: 2005
Publication date: 5.6.2005
Published in: Published in Journal of Monetary Economics, Volume 56, Issue 2, March 2009, Pages 275-282
Pages: 43 s.
Keywords: rahapolitiikka; USA; pörssit; korot; osakkeet; hinnat; pääomamarkkinat; VAR; riippuvuudet
JEL: E61; E52; E43
Abstract: 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 (CEE 1999).We find great interdependence between interest rate setting and stock prices.Stock prices immediately fall by 1.5 per cent due to a monetary policy shock that raises the federal funds rate by ten basis points.A stock price shock increasing stock prices by one per cent leads to an increase in the interest rate of five basis points.Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks.We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks. Key words: VAR, monetary policy, asset prices, identification JEL classification numbers: E61, E52, E43
Note: Ilmestynyt myös 2008/4 Norges Bank WP sekä Journal of monetary economics 2009 ; 56 ; 2.

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