What If the Fed Increased the Weight of the Stock Price Gap in its Reaction Function?

Posted: 1 Jun 2010

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

Université de Paris 1 Panthéon-Sorbonne; Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: April 4, 2006

Abstract

The Fed has never admitted targeting stock prices. Yet our empirical analysis, based on a small macro-econometric model of the U.S. economy in the period 1981-2002, shows that the Fed explicitly takes into account stock price variations in its reaction function. Furthermore, our simulation results suggest that increasing the weight attributed to stock price changes could prove advisable, as the stock market wealth effect increases. This measure would help to contain the additional instability brought about by this economic evolution, and confirm the current political trend towards protecting stock owners.

Keywords: monetary policy, stock prices, wealth effect, macroeconomic and financial stability

JEL Classification: E17, E44, E52

Suggested Citation

Romaniuk, Katarzyna, What If the Fed Increased the Weight of the Stock Price Gap in its Reaction Function? (April 4, 2006). Journal of Policy Modeling, Vol. 28, No. 7, 2006, Available at SSRN: https://ssrn.com/abstract=1618362

Katarzyna Romaniuk (Contact Author)

Université de Paris 1 Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, 75005
France

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

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