TY  - JOUR
AU  - Rigobon,Roberto
AU  - Sack,Brian
TI  - Measuring the Reaction of Monetary Policy to the Stock Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8350
PY  - 2001
Y2  - July 2001
UR  - http://www.nber.org/papers/w8350
L1  - http://www.nber.org/papers/w8350.pdf
N1  - Author contact info:
Roberto Rigobon
MIT Sloan School of Management
100 Main Street, E62-516
Cambridge, MA 02142
Tel: 617/258-8374
Fax: 617/258-6855
E-Mail: rigobon@mit.edu

Brian Sack
Executive Vice President and Head of Markets Group
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
E-Mail: brian.sack@ny.frb.org
AB  - 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.
ER  -