Monetary policy and the stock market - A partly recursive SVAR estimator

Abstract

This study analyzes the interdependence of monetary policy and the stock market in a structural VAR model. We argue that commonly used short- and long-run restrictions on the interaction of both variables might not hold and propose an estimator not requiring any of these restrictions on the interaction of monetary policy and the stock market. The proposed estimator combines a data driven and restriction based identification approach. In particular, the estimator allows the researcher to order and identify some shocks recursively, while other shocks can remain unrestricted and are identified based on independence and non-Gaussianity. We find that a positive stock market shock contemporaneously increases the nominal interest rate, while a contractionary monetary policy shock leads to lower stock returns on impact. Furthermore, we present evidence that monetary policy is non-neutral with respect to long-run real stock prices.