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Monetary policy and Stock Market
Finance & Accounting
Pages 20 (5020 words)
Examining the impact of stock market volatility on monetary policy – a time series investigation of the US economy Introduction Ascertaining stability of prices and ensuring sustainable economic growth have been the stated twin objectives that have guided the US Federal Reserve System’s conduct of monetary policy.
Further, in reference to the goal of price stability, whether prices of assets should be within the purview of stabilization goals is a contended issue. As Alan Greenspan (1996) pointed out, it is unclear regarding which prices really matter. Prices of goods and services in current circulation which constitutes the current inflation figures are definitely critical for the long term stable growth of the economy, but do prices of goods or services to be produced in future, or rather prices of assets which are essentially claims on goods and services to be produced in the future also warrant such attention from the perspective of stabilization? This is the primary query that motivates this dissertation. The objective is to evaluate the significance of asset prices in the conduct of monetary policy. Note that there is both a normative and a positive part to the query. The normative part asks if monetary policy should be conducted with an explicit incorporation of asset prices. We shall however focus on the positive query of whether monetary policy is influenced directly or indirectly by volatility of asset prices. Using updated real time data, we shall estimate a simple and augmented Taylor rule to evaluate whether asset prices do have any direct impact on the conduct of monetary policy. ...
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