Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/23448 
Year of Publication: 
2004
Series/Report no.: 
Public Policy Discussion Papers No. 04-2
Publisher: 
Federal Reserve Bank of Boston, Boston, MA
Abstract: 
The appropriate role for equity prices in monetary policy deliberations has been hotly debated for some time. Recent work suggests that equity prices have affected monetary policy decisions above and beyond their indirect effect on the traditional goal variables of the FOMC. However, the correlation between stock price movements and these other goal variables has made the identification of the equity price effect problematic. Previous studies have used a forecast that embodies a different information set from the one used by the FOMC, which could bias the estimated coefficient on equity prices. The authors show that, in fact, the methods used in the earlier literature fail to adequately disentangle the observational equivalence problem. The authors then show that after controlling for the information that actually enters the FOMC's decision-making process, equity prices have had no independent effect on monetary policy.
Subjects: 
monetary policy
policy rules
asset prices
JEL: 
E61
E52
Document Type: 
Working Paper

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