The Impact of Monetary Policy on Asset Prices, Issue 8794
Estimating the response of asset prices to changes in monetary policy is complicated by the endogeneity of policy decisions and the fact that both interest rates and asset prices react to numerous other variables. This paper develops a new estimator that is based on the heteroskedasticity that exists in high frequency data. We show that the response of asset prices to changes in monetary policy can be identified based on the increase in the variance of policy shocks that occurs on days of FOMC meetings and of the Chairman's semi-annual monetary policy testimony to Congress. The identification approach employed requires a much weaker set of assumptions than needed under the 'event-study' approach that is typically used in this context. The results indicate that an increase in short-term interest rates results in a decline in stock prices and in an upward shift in the yield curve that becomes smaller at longer maturities. The findings also suggest that the event-study estimates contain biases that make the estimated effects on stock prices appear too small and those on Treasury yields too large
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Andrei Shleifer asset prices asymptotic basis points bias Bomfim Brian Sack Coef Std Dev coefficients common shock covariance matrix Dev Coef Std DJIA E.S. Assumptions equations estimating the responsiveness eurodollar futures rates eurodollar rate event-study approach event-study estimates F-test P-value Test federal funds futures federal funds rate Federal Reserve FOMC meeting funds futures rate Funds Futures Shocks heteroskedasticity heteroskedasticity-based estimates homoskedastic identification approach Impact of Monetary instrumental variables maturities measures of policy mimeo monetary policy shocks Nasdaq NBER Working Paper non-policy dates O.I. Restrictions omitted variables Paul Beaudry policy actions policy dates policy expectations policy moves policy surprise prices to monetary rates and asset response of asset Response of Stock sample shift short-term interest rate significant Std Dev Coef stock market stock market indexes stock prices structural shocks subsample Table C.l Term Structure Test of E.S. test statistic Treasury yields uncorrelated valid www.nber.org yield curve