NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Measuring the Reaction of Monetary Policy to the Stock Market

Roberto Rigobon, Brian Sack

NBER Working Paper No. 8350
Issued in July 2001
NBER Program(s):   AP   IFM   ME

Movements in the stock market can have a significant impact on the macroeconomy and are therefore likely to be an important factor in the determination of monetary policy. However, little is known about the magnitude of the Federal Reserve's reaction to the stock market. One reason is that it is difficult to estimate the policy reaction because of the simultaneous response of equity prices to interest rate changes. This paper uses an identification technique based on the heteroskedasticity of stock market returns to identify the reaction of monetary policy to the stock market. The results indicate that monetary policy reacts significantly to stock market movements, with a 5% rise (fall) in the S&P 500 index increasing the likelihood of a 25 basis point tightening (easing) by about a half. This reaction is roughly of the magnitude that would be expected from estimates of the impact of stock market movements on aggregate demand. Thus, it appears that the Federal Reserve systematically responds to stock price movements only to the extent warranted by their impact on the macroeconomy.

download in pdf format
   (494 K)

email paper

A non-technical summary of this paper is available in the September 2001 NBER digest.  You can sign up to receive the NBER Digest by email.

This paper is available as PDF (494 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8350

Published: Rigobon, Robert and Brian Sack. "Measuring The Reaction Of Monetary Policy To The Stock Market," Quarterly Journal of Economics, 2003, v118(2,May), 639-669.

Users who downloaded this paper also downloaded these:
Rigobon and Sack w8794 The Impact of Monetary Policy on Asset Prices
Mishkin w8617 The Transmission Mechanism and the Role of Asset Prices in Monetary Policy
Mishkin and White w8992 U.S. Stock Market Crashes and Their Aftermath: Implications for Monetary Policy
Christiano, Ilut, Motto, and Rostagno w16402 Monetary Policy and Stock Market Booms
Bordo, Dueker, and Wheelock w14019 Inflation, Monetary Policy and Stock Market Conditions
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us