Monetary policy and the stock market - A partly recursive SVAR estimator
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Date
2020
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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.
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Keywords
SVAR, monetary policy, stock market, non-Gaussian, recursive, identification