Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82353
Authors: 
Ravn, Søren Hove
Year of Publication: 
2011
Series/Report no.: 
Danmarks Nationalbank Working Papers 75
Abstract: 
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.
Subjects: 
Monetary Policy
Asset Prices
Asymmetries
JEL: 
E44
E52
E58
Document Type: 
Working Paper

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