Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212015 
Year of Publication: 
2005
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 17/2005
Publisher: 
Bank of Finland, Helsinki
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.
Subjects: 
VAR
monetary policy
asset prices
identification
JEL: 
E61
E52
E43
Persistent Identifier of the first edition: 
ISBN: 
952-462-226-2
Document Type: 
Working Paper

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