Monetary Policy and the U.S. Stock Market
34 Pages Posted: 17 Jan 2008
What is the influence of stock market valuations on monetary policy? This paper uses a forward looking Taylor rule model to examine empirically if monetary policy, since the October 19, 1987 stock market crash, has been influenced by the valuation of the stock market as measured by the S&P 500 P/E ratio. We estimate the model using revised and real time data and find no empirical evidence that the Federal Reserve policy attempted to moderate stock market valuations during the late 1990s despite the "irrational exuberance" comments by Chairman Greenspan in late 1996. Actually, the empirical evidence suggests that the Fed accommodated the high valuations of the stock market during this period.
Keywords: monetary policy, stock market, Federal funds rate,Taylor's rule, bubbles
JEL Classification: E50, G10
Suggested Citation: Suggested Citation