WP 75/2011: Has the Fed Reacted Asymmetrically to Stock Prices?
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| Author(s): | Ravn, Søren Hove |
| Subject: | International Economy; Danish economy; Monetary- and foreign-exchange policy; USA; Other economic analyses; Monetary policy |
| Type: | Working Papers |
| Year of publication: | 2011 |
| Date of publication: | 10/10/2011 |
Yes. Existing studies of the possible role of asset prices in monetary policy implicitly assume that central banks respond to asset price movements in a fully symmetric way. This paper offers a new perspective by allowing for different policy reactions to stock price increases and decreases, respectively. To avoid endogeneity problems, I employ the method of identification through heteroskedasticity. I then demonstrate that the reaction of the Federal Reserve has indeed been asymmetric during the period 1998-2008. While a 5% drop in the S&P 500 index is shown to increase the probability of a 25 basis point interest rate cut by 1/3, no significant reaction to stock price increases can be identified.
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