Evolution of Monetary Mechanism in the U.S.: The Role of Asset Returns

28 Pages Posted: 21 Aug 2013 Last revised: 7 Mar 2016

See all articles by Beatrice Simo-Kengne

Beatrice Simo-Kengne

University of Pretoria - Department of Economics

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Rangan Gupta

University of Pretoria - Department of Economics

Mehmet Balcilar

Eastern Mediterranean University

Date Written: November 29, 2013

Abstract

This paper investigates whether changes in the monetary transmission mechanism as captured by the interest rate respond to variations in asset returns. We distinguish between low-volatility (bull) and high-volatility (bear) markets and employ a TVP-VAR approach with stochastic volatility to assess the evolution of the interest rate in relation to housing and stock returns. We measure the relative importance of housing and stock returns in the movements of the interest rate and their possible feedback effects over both time and horizon and across regimes. Empirical results from annual data on the US spanning the period from 1890 to 2012 indicate that the interest rate responds more strongly to asset returns during low-volatility (bull) regimes. While the bigger interest-rate effect of stock-return shocks occurs prior to the 1970s, the interest rate appears to respond more strongly to housing-return than stock return shocks after the 1970s. Similarly, a higher interest rate exerts a larger effect on both asset categories during low-volatility (bull) markets. Particularly, larger negative responses of housing return to interest-rate shocks occur after the 1980s, corresponding to the low-volatility (bull) regime in the housing market. Conversely, the stock-return effect of interest-rate shocks dominates before the 1980s, where stock-market booms achieved more importance.

Keywords: monetary policy, house prices, stock prices, TVP-VAR

JEL Classification: C32, E52, G10

Suggested Citation

Simo-Kengne, Beatrice and Miller, Stephen M. and Gupta, Rangan and Balcilar, Mehmet, Evolution of Monetary Mechanism in the U.S.: The Role of Asset Returns (November 29, 2013). Journal of Real Estate Finance and Economics, Vol. 52, No. 3, 2016 . Available at SSRN: https://ssrn.com/abstract=2313260 or http://dx.doi.org/10.2139/ssrn.2313260

Beatrice Simo-Kengne

University of Pretoria - Department of Economics ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Mehmet Balcilar

Eastern Mediterranean University ( email )

Gazimagusa
Turkey

HOME PAGE: http://www.mbalcilar.net

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