Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis

28 Pages Posted: 20 Apr 2017

See all articles by Knut Are Aastveit

Knut Are Aastveit

Norges Bank

Francesco Furlanetto

Norges Bank

Francesca Loria

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: March 8, 2017

Abstract

In this paper we use a structural VAR model with time-varying parameters and stochastic volatility to investigate whether the Federal Reserve has responded systematically to asset prices and whether this response has changed over time. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices and stock prices. We find some time variation in the coefficients for house prices and stock prices but fairly stable coefficients over time for inflation and the output gap.

Our results indicate that the systematic component of monetary policy in the US:

i) attached a positive weight to real house price growth but lowered it prior to the crisis and eventually raised it again and,

ii) only episodically took real stock price growth into account.

Keywords: Bayesian VAR, Time-varying parameters, Monetary policy, House prices, Stock market

JEL Classification: C32, E44, E52, E58

Suggested Citation

Aastveit, Knut Are and Furlanetto, Francesco and Loria, Francesca, Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis (March 8, 2017). Norges Bank Working Paper 01/2017, Available at SSRN: https://ssrn.com/abstract=2955644 or http://dx.doi.org/10.2139/ssrn.2955644

Knut Are Aastveit

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Francesco Furlanetto (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Francesca Loria

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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