John, Tatom (2009): U.S. Monetary Policy and Stock Prices: Should the Fed Attempt to Control Stock Prices?
Download (211Kb) | Preview
This article rejects the linkages in proposals that the Federal Reserve Bank (Fed) target equity prices. The real federal funds rate (RFF) and stock prices (SP) are uncorrelated; causality tests show a positive effect of SP on RFF and a negative effect of SP on RFF. These results occur as part of the dynamics of a negative cointegrated relationship between SP and RFF. A theoretically expected inverse relation between SP and inflation accounts for the results. The negative effect of SP on FF is also confirmed in a Taylor Rule estimate. Higher stock prices anticipate lower, not higher, inflation.
|Item Type:||MPRA Paper|
|Original Title:||U.S. Monetary Policy and Stock Prices: Should the Fed Attempt to Control Stock Prices?|
|Keywords:||Monetary Policy; Bubbles; Asset Prices; Inflation.|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||John Tatom|
|Date Deposited:||07. Jan 2010 09:21|
|Last Modified:||14. Feb 2013 01:18|
Bakshi, Gurdip S. and Zhiwu Chen (1996). “Inflation, Asset Prices, and the Term Structure of Interest Rates in Monetary Economies.” Review of Financial Studies 9: 241-76.
Bank for International Settlements (1998). “ The Role of Asset Prices in the Formulation of Monetary Policy,” Basel: BIS Conference Papers, Vol. 5.
Barro, Robert J. (1996). “Inflation and Growth” Federal Reserve Bank of St. Louis Review 48 (3), May/June: 153-69.
Bernanke, Ben and Mark Gertler (1999). “Monetary Policy and Asset Price Volatility.” Federal Reserve Bank of Kansas City Economic Review IV: 17-51.
Booth, James R., and Lena Chua Booth (1997). "Economic Factors, Monetary Policy, and Expected Returns on Stocks and Bonds." Federal Reserve Bank of San Francisco Economic Review 2: 32-42.
Bullard, James B. and Eric Schaling (2002). “Why the Fed Should Ignore the Stock Market.” Federal Reserve Bank of St. Louis Economic Review March/April: 35.41.
Campbell, John Y. and Robert J. Shiller (1988). “Valuation Ratios and the Long-Run Stock Market Outlook.” Journal of Portfolio Management 24 (2), June: 11-26.
Cecchetti, Steven G., Hans Genberg, John Lipsky and Sushil Wadhwani (2000). “Asset Prices and Central Bank Policy.” Conference paper presented at “ Central Banks and Asset Prices,” International Centre for Monetary and Banking Studies, Geneva, May 5.
Council of Economic Advisers (2001). Economic Report of the President. Washington D.C.: Government Printing Office.
Engel, Robert F. and C. W. J. Granger (1987). “ Co-Integration and Error Correction: Representation, Estimation and Testing.” Econometrica 55 (2), March: 251-76.
Fama, Eugene F. (1981). "Stock Returns, Real Activity, Inflation, and Money." American Economic Review 71: 545-65.
Fama, Eugene F. and Kenneth R. French (1989). "Stock Returns, Expected Returns, and Real Activity." Journal of Financial Economics 45: 1089-1108.
Feldstein, Martin (1981). “ Inflation and the Stock Market.” American Economic Review September: 839-47.
Gertler, Mark, Marvin Goodfriend, Otmar Issing and Luigi Spaventa (1998). “ Asset Prices and Monetary Policy: Four Views.” London: Centre for Economic Policy Research and the Bank for International Settlements.
Glassman, James K., and Kevin A. Hassett (2001). “Did the Fed’s Obsession with Stocks Cause it to Miss the Slowdown?” Wall Street Journal, January 5.
Greenspan, Alan (1996). “The Challenge of Monetary Policy in a Democratic Society.” Francis Boyer Lecture, American Enterprise Institute for Public Policy, December 5.
Hayford, Marc and A.G. Malliaris (2001). “Is the Federal Reserve Bank Stock Market Bubble Neutral?” In George G. Kaufman (Ed.), Asset Price Bubbles: Implications for Monetary Policy. Elsevier Science-JAI: 229-43.
Hess, Patrick J. and Bong-Soo Lee (1999). “Stock Returns and Inflation with Supply and Demand Shocks.” Review of Financial Studies 12: 1203-18.
Jensen, Gerald R., Jeffrey M. Mercer and Robert Johnson (1996). "Business Conditions, Monetary Policy, and Expected Security Returns." Journal of Financial Economics 40 (2), February: 213-37.
Miller, Marcus, Paul Weller and Lei Zhang (1999). “Moral Hazard and U.S. Stock Market: Has Mr. Greenspan Created a Bubble?” Department of Economics, Warwick University.
Modigliani, Franco and Robert Cohn (1979). "Inflation, Rational Valuation and the Market." Financial Analysts Journal March/April.
Prakken, Joel (2000). “Potential Productivity and the Stock Market.” Business Economics April. http://findarticles.com/p/articles/mi_m1094/is_2_35/ai_63607828/.
Rigoban, Roberto and Brian Sack (2001). “Measuring the Reaction of Monetary Policy to the Stock Market.” Board of Governors of the Federal Reserve, Finance and Economics Discussion Series, Working Paper No. 2001-14, April 19.
Sharpe, Steven A. (2002). “Reexamining Stock Price Valuation and Inflation: The Implications of Analysts’ Earnings Forecasts.” The Review of Economics and Statistics 80 (4), November: 632-48.
Shen, Pu (2000). “The P/E Ratio and Stock Price Performance.” Federal Reserve Bank of Kansas City Economic Review 85 (4): 23-36.
Smets, Frank (1997a). “Asset Prices and Monetary Policy: Theory and Evidence.” Unpublished paper, Bank for International Settlements.
Smets, Frank (1997b). “ Financial Asset Prices and Monetary Policy: Theory and Evidence.” Centre for Economic Policy Research Working Paper No. 1751, November.
Stock, James H. and Mark Watson (2001). “Forecasting Output and Inflation: The Role of Asset Prices.” National Bureau of Economic Research Working Paper # 8180, March.
Tatom, John A., and James E. Turley (1979). “Inflation and Taxes: Disincentives for Capital Formation.” Federal Reserve Bank of St. Louis Economic Review January. Reprinted in Federal Reserve Readings on Inflation, Federal Reserve Bank of New York, February: 167-73.
Tatom, John A. and Thomas Rose (2000). “ Are There Global Differences in Real Cash Rates? A Review of Some Long-Run Asset Price Relationships.” DePaul University Working Paper, November.
Tatom, John A. (2002). “ Stock Prices, Inflation and Monetary Policy.” Business Economics October: 7-19.
Taylor, John B. (1993). “Discretion vs. Policy Rule in Practice.” Carnegie-Rochester Conference Series on Public Policy 39: 195-214.
Taylor, John B. (1999). “A Historical Analysis of Monetary Policy Rules.” In John B. Taylor (Ed.), Monetary Policy Rule. Chicago: University of Chicago Press: 319-41.