Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

An augmented Taylor rule for the Federal Reserve's response to asset prices

An augmented Taylor rule for the Federal Reserve's response to asset prices This paper investigates whether and how the US Federal Reserve has reacted to asset price developments over the period 1979­2011. We examine both the opportunities and limitations of incorporating two asset prices, equity and real estate, into a standard forward-looking and inertial interest rate rule, based on ex-post realised monthly data and taking into account the inherent endogeneity. While the role of house prices is found to be ambiguous due to weak identification, stock prices do represent an important aspect of the Federal Reserve's monetary policy design. Our findings suggest that monetary policymakers did not target stock prices systematically, but rather reacted on few occasions during the full sample period, when misalignments in stock prices were relatively large. Keywords: monetary policy; central bank; stock prices; house prices; endogeneity; Taylor rule. Reference to this paper should be made as follows: Hafner, C.M. and Lauwers, A.R. (2017) `An augmented Taylor rule for the Federal Reserve's response to asset prices', Int. J. Computational Economics and Econometrics, Vol. 7, Nos. 1/2, pp.115­151. Biographical notes: Christian M. Hafner, PhD, is a Professor and President of the Louvain School of Statistics, Biostatistics, and Actuarial Science (LSBA) at the Université catholique de Louvain (Belgium). He http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Computational Economics and Econometrics Inderscience Publishers

An augmented Taylor rule for the Federal Reserve's response to asset prices

Loading next page...
 
/lp/inderscience-publishers/an-augmented-taylor-rule-for-the-federal-reserve-s-response-to-asset-OHJEu008cE
Publisher
Inderscience Publishers
Copyright
Copyright © 2017 Inderscience Enterprises Ltd.
ISSN
1757-1170
eISSN
1757-1189
DOI
10.1504/IJCEE.2017.080635
Publisher site
See Article on Publisher Site

Abstract

This paper investigates whether and how the US Federal Reserve has reacted to asset price developments over the period 1979­2011. We examine both the opportunities and limitations of incorporating two asset prices, equity and real estate, into a standard forward-looking and inertial interest rate rule, based on ex-post realised monthly data and taking into account the inherent endogeneity. While the role of house prices is found to be ambiguous due to weak identification, stock prices do represent an important aspect of the Federal Reserve's monetary policy design. Our findings suggest that monetary policymakers did not target stock prices systematically, but rather reacted on few occasions during the full sample period, when misalignments in stock prices were relatively large. Keywords: monetary policy; central bank; stock prices; house prices; endogeneity; Taylor rule. Reference to this paper should be made as follows: Hafner, C.M. and Lauwers, A.R. (2017) `An augmented Taylor rule for the Federal Reserve's response to asset prices', Int. J. Computational Economics and Econometrics, Vol. 7, Nos. 1/2, pp.115­151. Biographical notes: Christian M. Hafner, PhD, is a Professor and President of the Louvain School of Statistics, Biostatistics, and Actuarial Science (LSBA) at the Université catholique de Louvain (Belgium). He

Journal

International Journal of Computational Economics and EconometricsInderscience Publishers

Published: Jan 1, 2017

There are no references for this article.