The Impact of Monetary Policy on Asset Prices

Roberto Rigobon, Brian P. Sack

NBER Working Paper No. 8794
Issued in February 2002
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

Estimating the response of asset prices to changes in monetary policy is complicated by the endogeneity of policy decisions and the fact that both interest rates and asset prices react to numerous other variables. This paper develops a new estimator that is based on the heteroskedasticity that exists in high frequency data. We show that the response of asset prices to changes in monetary policy can be identified based on the increase in the variance of policy shocks that occurs on days of FOMC meetings and of the Chairman's semi-annual monetary policy testimony to Congress. The identification approach employed requires a much weaker set of assumptions than needed under the 'event-study' approach that is typically used in this context. The results indicate that an increase in short-term interest rates results in a decline in stock prices and in an upward shift in the yield curve that becomes smaller at longer maturities. The findings also suggest that the event-study estimates contain biases that make the estimated effects on stock prices appear too small and those on Treasury yields too large.

download in pdf format
   (400 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8794

Published: Rigobon, Roberto and Brian Sack. "The Impact Of Monetary Policy On Asset Prices," Journal of Monetary Economics, 2004, v51(8,Nov), 1553-1575. citation courtesy of

Users who downloaded this paper also downloaded* these:
Cecchetti, Genberg, and Wadhwani w8970 Asset Prices in a Flexible Inflation Targeting Framework
Schwartz w9321 Asset Price Inflation and Monetary Policy
Bordo and Jeanne w8966 Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy
Bernanke and Kuttner w10402 What Explains the Stock Market's Reaction to Federal Reserve Policy?
Bernanke and Gertler w7559 Monetary Policy and Asset Price Volatility
NBER Videos

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

Contact Us