The response of asset prices to monetary policy shocks: stronger than thought

We estimate the response of a set of asset classes to monetary policy shocks using a Structural Factor Model and a large dataset for the euro area. Our evidence points to a quicker and larger pass-through of monetary policy shocks to asset prices, compared to results based on traditional small-scale VARs. Our results are consistent with the observed large swings in asset prices, which standard models are not able to explain. Indeed, owing to the large information set it is able to handle, the model solves the problem of nonfundamentalness of the shocks, linked to the forward-looking behavior of economic agents. In terms of policy implications, our results point to stronger financial stability consequences of an exogenous monetary policy tightening, also in the form of a quicker than expected unwinding of QE, than commonly thought.

ALESSI Lucia;  KERSSENFISCHER Mark; 

2017-06-12

European Central Bank

JRC102450

978-92-899-2215-9,   

1725-2806,   

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1967.en.pdf?23d2ec9ce1c93d4315e88bb90d8531ff,    https://publications.jrc.ec.europa.eu/repository/handle/JRC102450,   

10.2866/453935,