Inflation, Monetary Policy and Stock Market Conditions: Quantitative Evidence from a Hybrid Latent-Variable VAR

FRB of St. Louis Working Paper No. 2008-012A

33 Pages Posted: 5 May 2008 Last revised: 3 Feb 2009

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Michael Dueker

Russell Investments

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Date Written: January 29, 2009

Abstract

This paper examines the association between inflation, monetary policy and U.S. stock market conditions during the second half of the 20th century. We use a latent-variable VAR to estimate the impact of inflation and other macroeconomic shocks on a latent index of stock market conditions. Our objective is to investigate the extent to which various shocks contribute to changes in market conditions, above and beyond their direct effects on real stock prices. We find that disinflation shocks promote market booms and inflation shocks contribute to busts. Further, we find that inflation shocks can explain more of the variation in real stock prices when stock market conditions are taken into account.

Keywords: Stock market conditions, booms, busts, monetary policy, inflation, Qual-VAR

JEL Classification: E31, E52, G12, N12, N22

Suggested Citation

Bordo, Michael D. and Dueker, Michael and Wheelock, David C., Inflation, Monetary Policy and Stock Market Conditions: Quantitative Evidence from a Hybrid Latent-Variable VAR (January 29, 2009). FRB of St. Louis Working Paper No. 2008-012A . Available at SSRN: https://ssrn.com/abstract=1129469 or http://dx.doi.org/10.2139/ssrn.1129469

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Dueker

Russell Investments ( email )

909 A Street
Tacoma, WA 98402
United States

HOME PAGE: http://sites.google.com/site/michaeldueker

David C. Wheelock (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

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