Working Paper: NBER ID: w19981
Authors: Jordi Gali; Luca Gambetti
Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which, after a short-run decline, stock prices increase persistently in response to an exogenous tightening of monetary policy. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.
Keywords: monetary policy; stock market bubbles; asset prices
JEL Codes: E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Stock prices (G19) |
| Exogenous tightening of monetary policy (E52) | Stock prices (G19) |
| Interest rate hike (E43) | Stock prices (G19) |
| Endogenous response of interest rates to stock prices (E43) | Stock prices (G19) |