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Title:Stock market uncertainty and monetary policy reaction functions of the Federal Reserve Bank PDF Logo
Authors:Jovanović, Mario
Zimmermann, Tobias
Issue Date:2008
Series/Report no.:Ruhr economic papers 77
Abstract: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.
Subjects:Monetary policy rules
financial markets
stock market uncertainty
EGARCH
JEL:E58
G01
ISBN:978-3-86788-083-1
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des RWI
Ruhr Economic Papers, RWI

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