Stock Prices and Monetary Policy

Stock Prices and Monetary Policy
Author: Paul De Grauwe
Publisher: CEPS
Total Pages: 22
Release: 2008
Genre: Monetary policy
ISBN: 929079819X

The question of whether central banks should target stock prices so as to prevent bubbles and crashes from occurring has been hotly debated. This paper analyses this question using a behavioural macroeconomic model. This model generates bubbles and crashes. It analyses how 'leaning against the wind' strategies, which aim to reduce the volatility of stock prices, can help in reducing volatility of output and inflation. We find that such policies can be effective in reducing macroeconomic volatility, thereby improving the trade-off between output and inflation variability. The strength of this result, however, depends on the degree of credibility of the inflation-targeting regime. In the absence of such credibility, policies aiming at stabilising stock prices do not stabilise output and inflation.

Identifying the Interdependence Between US Monetary Policy and the Stock Market

Identifying the Interdependence Between US Monetary Policy and the Stock Market
Author: Hilde C. Bjørnland
Publisher:
Total Pages: 0
Release: 2010
Genre:
ISBN:

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.

Asset Prices and Monetary Policy

Asset Prices and Monetary Policy
Author: John Y. Campbell
Publisher: University of Chicago Press
Total Pages: 444
Release: 2008-11-15
Genre: Business & Economics
ISBN: 0226092127

Economic growth, low inflation, and financial stability are among the most important goals of policy makers, and central banks such as the Federal Reserve are key institutions for achieving these goals. In Asset Prices and Monetary Policy, leading scholars and practitioners probe the interaction of central banks, asset markets, and the general economy to forge a new understanding of the challenges facing policy makers as they manage an increasingly complex economic system. The contributors examine how central bankers determine their policy prescriptions with reference to the fluctuating housing market, the balance of debt and credit, changing beliefs of investors, the level of commodity prices, and other factors. At a time when the public has never been more involved in stocks, retirement funds, and real estate investment, this insightful book will be useful to all those concerned with the current state of the economy.

Asset Price Bubbles

Asset Price Bubbles
Author: William Curt Hunter
Publisher: MIT Press
Total Pages: 650
Release: 2005
Genre: Business & Economics
ISBN: 9780262582537

A study of asset price bubbles and the implications for preventing financial instability.

Asset Prices and Central Bank Policy

Asset Prices and Central Bank Policy
Author: Stephen Giovanni Cecchetti
Publisher: Centre for Economic Policy Research
Total Pages: 164
Release: 2000
Genre: Business & Economics
ISBN: 9781898128533

Concludes the role of asset prices in monetary policy is one of the most important, and difficult, questions confronting central banks.

The Federal Reserve System Purposes and Functions

The Federal Reserve System Purposes and Functions
Author: Board of Governors of the Federal Reserve System
Publisher:
Total Pages: 0
Release: 2002
Genre: Banks and Banking
ISBN: 9780894991967

Provides an in-depth overview of the Federal Reserve System, including information about monetary policy and the economy, the Federal Reserve in the international sphere, supervision and regulation, consumer and community affairs and services offered by Reserve Banks. Contains several appendixes, including a brief explanation of Federal Reserve regulations, a glossary of terms, and a list of additional publications.

Portfolio Selection and Asset Pricing

Portfolio Selection and Asset Pricing
Author: Shouyang Wang
Publisher: Springer Science & Business Media
Total Pages: 260
Release: 2012-12-06
Genre: Business & Economics
ISBN: 3642559344

In our daily life, almost every family owns a portfolio of assets. This portfolio could contain real assets such as a car, or a house, as well as financial assets such as stocks, bonds or futures. Portfolio theory deals with how to form a satisfied portfolio among an enormous number of assets. Originally proposed by H. Markowtiz in 1952, the mean-variance methodology for portfolio optimization has been central to the research activities in this area and has served as a basis for the development of modem financial theory during the past four decades. Follow-on work with this approach has born much fruit for this field of study. Among all those research fruits, the most important is the capital asset pricing model (CAPM) proposed by Sharpe in 1964. This model greatly simplifies the input for portfolio selection and makes the mean-variance methodology into a practical application. Consequently, lots of models were proposed to price the capital assets. In this book, some of the most important progresses in portfolio theory are surveyed and a few new models for portfolio selection are presented. Models for asset pricing are illustrated and the empirical tests of CAPM for China's stock markets are made. The first chapter surveys ideas and principles of modeling the investment decision process of economic agents. It starts with the Markowitz criteria of formulating return and risk as mean and variance and then looks into other related criteria which are based on probability assumptions on future prices of securities.

Monetary Policy and the Stock Market in the Euro Area

Monetary Policy and the Stock Market in the Euro Area
Author: Claudio Morana
Publisher:
Total Pages: 0
Release: 2013
Genre:
ISBN:

In this paper we study the role of the stock market in the transmission mechanism in the euro area and evaluate whether price stability and financial stability are mutually consistent and complementary objectives. Four major conclusions can be drawn from our work. First, stock prices and, more generally, relative asset prices seem to play an important role in the transmission mechanism in the euro area. Second, we do not find any significant, direct impact of stock prices on inflation. These two findings taken together support the view that stock market prices may be important for monetary policy, independently of their direct impact on inflation. Third, permanent productivity shocks are the driving force of the stock market in the long-term and contribute significantly to its cyclical behaviour. Nevertheless, the bulk of cyclical dynamics in the stock market is explained by transitory shocks. Fourth, a monetary policy focused on maintaining price stability in the long-term can contribute also to stock market stability.