Has the Fed Reacted Asymmetrically to Stock Prices?

Ravn, SÃ ̧ren Hove

doi:10.1515/1935-1690.2452

Cited by 19 publications

(14 citation statements)

References 16 publications

(31 reference statements)

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“…The same result emerges in Castelnuovo and Nisticò (2010), in an estimated dynamic stochastic general equilibrium (DSGE) model where monetary policy responds to fluctuations in the stock market, and in Bjørnland and Leitemo (2009), in a VAR identified using a combination of short-run and long-run restrictions. In contrast, a more recent literature argues that the Rigobon and Sack's finding is confined to specific periods (around the 1987 stock market crash in Furlanetto (2011) and more generally around recession periods in Ravn (2012)). While those results rely on various forms of sample splitting, they may highlight some instability in the relationship between monetary policy and stock prices, thus calling for the use of a model with time-varying coefficients.…”

Section: Introductionmentioning

confidence: 93%

Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis

Aastveit¹,

Furlanetto²,

Loria

2017

SSRN Journal

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Section: Introductionmentioning

confidence: 93%

Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis

Aastveit¹,

Furlanetto²,

Loria

2017

SSRN Journal

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“…Similarly, but using a combination of short-run and long-run restrictions, Bjørnland and Leitemo (2009) provide evidence that a 1% rise in real stock prices leads to an interest rate increase of close to 4 basis points. In contrast, Ravn (2012) reports that the US central bank pursued in fact an asymmetric reaction towards movements in stock prices over the period 1998-2008: while a 5% drop in the S&P 500 index increases the probability of a 25-basis-point interest rate cut by 1/3, no significant reaction of monetary policy to stock price increases can be identified. More recently, Furlanetto (2008) Other contributions are, among others, Mattesini and Becchetti (2008) who rely on a more appropriate proxy for stock price disequilibria, Dupor and Conley (2004) who focus on the 'Great Moderation' period, and Pamela (2011) who test the 'Greenspan Put' hypothesis.…”

Section: Literature Review: Do Central Banks Respond To Asset Price Dmentioning

confidence: 96%

“…The asymmetry emerged principally after the 2001 crash of the dot-com bubble where interest rates were cut extensively, but were not raised in accordance with the asset market recovery in 2003. Using a distinct econometric method (an extension of the model of Rigobon and Sack (2003)), Ravn (2012) found that the US Federal Reserve has indeed followed such a policy over the period 1998-2008: while a 5% drop in the S&P 500 index increases the probability by 1/3 of a 25-basis-point interest rate cut, no significant reaction of monetary policy to stock price increases could be identified.…”

Section: A Presumed Asymmetric Response Towards Stock Pricesmentioning

confidence: 99%

“…Extending the Taylor rule with variables that accommodates misalignments in stock prices, Pamela (2011) finds evidence of the so called 'Greenspan Put' over the period 1987:08-2008, in which the reaction of the US Federal Reserve to asset prices was found significant and greater at times of financial crises. While in periods of financial turmoil this seems appropriate, its asymmetric character to stock price drops and hikes, be it confirmed or just putative, naturally creates serious moral hazard problems (Miller et al, 2002), encouraging excessive risk-taking behaviours (Ravn, 2012), and potentially paving the way to new financial imbalances (Bini Smaghi, 2009). …”

Section: Asymmetric Term (M )mentioning

confidence: 99%

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An augmented Taylor rule for the Federal Reserve's response to asset prices

Hafner

Lauwers

2017

IJCEE

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This paper investigates whether and how the US Federal Reserve has reacted to asset price developments over the period 1979-2011. We examine both the opportunities and limitations of incorporating two asset prices, equity and real estate, into a standard forward-looking and inertial interest rate rule, based on ex-post realised monthly data and taking into account the inherent endogeneity. While the role of house prices is found to be ambiguous due to weak identification, stock prices do represent an important aspect of the Federal Reserve's monetary policy design. Our findings suggest that monetary policymakers did not target stock prices systematically, but rather reacted on few occasions during the full sample period, when misalignments in stock prices were relatively large.

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“… Empirical studies suggest that monetary policy tends to react more to declines than to increases in equity prices (Ravn, 2012;. 8 This asymmetry may thus contribute to a secular rise in wealth inequality, as equity prices are prevented from falling too much in downturns, but their increases are not tempered in booms.…”

mentioning

confidence: 99%

Monetary Policy and Inequality

O'Farrell

Rawdanowicz

Inaba

2016

OECD Economics Department Working Papers

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JT03390505Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. ECO/WKP(2016)5 UnclassifiedEnglish -Or. English ECO/WKP(2016)5 2 OECD Working Papers should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the author(s).Working Papers describe preliminary results or research in progress by the author(s) and are published to stimulate discussion on a broad range of issues on which the OECD works.Comments on Working Papers are welcomed, and may be sent to the Economics Department, OECD, 2 rue André-Pascal, 75775 Paris Cedex 16, France, or by e-mail to eco.contact@oecd.org.All Economics Department Working Papers are available at www.oecd.org/eco/workingpapers. © OECD (2016)You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for commercial use and translation rights should be submitted to rights@oecd.org ECO/WKP(2016)5 3 ABSTRACT/RÉSUMÉ Monetary Policy and InequalityThis paper analyses two-way interactions between monetary policy and inequality in selected advanced economies. In the context of a highly accommodative monetary stance over recent years, the analysis focuses on the effects of monetary policy on inequality over the business cycle via its impacts on returns on assets, the cost of debt servicing and asset prices. While monetary policy easing has a priori ambiguous effects on income and net wealth inequality, in practice these effects are estimated to be small. Cross-country differences in the size and distribution of income and net wealth explain contrasting effects. A house price increase generally reduces net wealth inequality, while the opposite is true for increases in equity and bond prices. Higher inequality can reduce the effectiveness of monetary policy stimulus in boosting private consumption, but such effects are estimated to be small. Cross-country differences in the size and composition of household financial assets rather than in their distribution are more relevant for differences in the effectiveness of monetary policy, especially via the wealth channel. JEL classification codes: D31, D63, E21, E3, E5.Key words: income inequality, net wealth inequality, monetary policy, consumption wealth effects. ******************** Politique monétaire et inégalitésLe présent article a pour objet d'analyser les interactions réciproques entre la politique monétaire et les inégalités dans certaines économies avancées. Dans le contexte d'une politique monétaire très accommodante au cours des dernières années, l'ana...

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Has the Fed Reacted Asymmetrically to Stock Prices?

Cited by 19 publications

References 16 publications

Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis

Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis

An augmented Taylor rule for the Federal Reserve's response to asset prices

Monetary Policy and Inequality

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