The Response of Asset Prices to Monetary Policy Shocks: Stronger Than Thought
Standard macroeconomic theory predicts rapid responses of asset prices to monetary policy shocks. Small-scale VARs, however, often find sluggish and insignificant impact effects. Using the same high-frequency instrument to identify monetary policy shocks, we show that a large-scale Dynamic Factor Model finds overall stronger and quicker asset price reactions compared to a benchmark VAR, both on euro area and US data. Our results suggest that incorporating a sufficiently large information set is crucial to estimate monetary policy effects.
ALESSI Lucia;
KERSSENFISCHER Mark;
2019-09-11
WILEY
JRC116037
0883-7252 (online),
https://onlinelibrary.wiley.com/doi/epdf/10.1002/jae.2706,
https://publications.jrc.ec.europa.eu/repository/handle/JRC116037,
10.1002/jae.2706 (online),
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