Københavns Universitet Has the Fed Reacted Asymmetrically to Stock Prices? Has the Fed Reacted Asymmetrically to Stock Prices?

Abstract

Abstract This paper presents an empirical study of a potential asymmetry in the response of monetary policy to stock prices in the US. The main …nding is that while monetary policy reacts signi…cantly to stock price drops, no signi…cant reaction to stock price increases is found. This result is obtained by applying the method of identi…cation through heteroskedasticity to a daily dataset covering the period 1998-2008. The result is con…rmed in an estimated, augmented Taylor rule based on monthly data for the same period. The size of the estimated, asymmetric reaction is modest. The study constitutes an empirical contribution to the debate about the role of asset prices in monetary policy, which has seen a revival in the aftermath of the crisis. In particular, the results lend empirical support to recent claims that the pre-crisis approach to monetary policy implied an asymmetric policy stance towards stock price movements