Working Paper

The Time-Varying Effect of Monetary Policy on Asset Prices

Abstract: This paper studies how monetary policy jointly affects asset prices and the real economy in the United States. To this end, I develop an estimator that uses high-frequency surprises as a proxy for the structural monetary policy shocks. This is achieved by integrating the surprises into a vector autoregressive model as an exogenous variable. I show analytically that this approach identifies the true relative impulse responses. When allowing for time-varying model parameters, I find that, compared to output, the response of stock and house prices to monetary policy shocks was particularly low before the 2007-09 financial crisis.

JEL Classification: E44; E52; E58; E43; G12;

https://doi.org/10.24148/wp2017-09