The Impact of Monetary Policy on Asset Prices

By Roberto Rigobon, Brian P. Sack. 2004

1,117 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b1df80c9e6f9ac3400bc379798e041ee4b30276e

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Citations in the corpus

Monetary Policy and Bank Profitability in a Low Interest Rate Environment (2018, neutral): “…on net interest income.8 The paper also contributes to the literature on the impact of monetary policy on expected profitability of firms as measured by stock market returns (Thorbecke, 1997; Bernanke and Kuttner, 2005; Rigobon and Sack, 2004; Ehrmann and Fratzscher, 2004; English, et al., 2014).”
The Information Content of FOMC Minutes (2006, background): “Therefore, increased central bank transparency is 6 Asset price changes in response to the release of Federal Open Market Committee (FOMC) statements are examined in Gurkaynak, Sack and Swanson (2005), while Rigobon and Sack (2004) also measure the effect of FOMC Chairman’s testimony to Congress.”
OIL PRICE SHOCKS AND STOCK MARKET BOOMS IN AN OIL EXPORTING COUNTRY (2009, neutral): “This is consistent with the quick adjustment in asset prices observed in the data following monetary policy surprises (see e.g. Rigobon and Sack, 2004; Zettelmeyer, 2004).”
The role of house prices in the monetary policy transmission mechanism in small open economies (2010, background): “Due to their role as stores of wealth, they could also be important transmitters of shocks since they react quickly to news (incl. monetary policy announcements), as emphasized in Zettelmeyer (2004), Rigobon and Sack (2004) and Bernanke and Kuttner (2005) among others.”
High Frequency Identification of Monetary Non-Neutrality: The Information Effect (2018, positive): “We also present results for a heteroskedasticity-based estimation approach (Rigobon 2003; Rigobon and Sack 2004) which is based on a weaker identifying assumption to verify that our baseline identifying assumption is reasonable.”
Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets (2006, positive): “To overcome this problem, we follow the approach of a recent series of papers by Rigobon (2003), Rigobon and Sack (2003a,b, 2004), and Sentana and Fiorentini (2001), who use the conditional heteroskedasticity in the high-frequency data to identify the contemporaneous response coefficients. The idea ”
A unified measure of Fed monetary policy shocks (2019, methodology): “The literature on the central bank private information effect has called into question this assertion, however (Romer and Romer (2000), Campbell et al.”
Stock market conditions and monetary policy in a DSGE model for the U.S. (2010, background): “3See, among the others, Sangiorgi and Santoro (2006) and Challe and Giannitsarou (2007).”