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The response of asset prices to monetary policy shocks: Stronger than thought
Author(s) -
Alessi Lucia,
Kerssenfischer Mark
Publication year - 2019
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2706
Subject(s) - economics , monetary policy , asset (computer security) , monetary economics , vector autoregression , benchmark (surveying) , econometrics , scale (ratio) , macroeconomics , computer science , physics , computer security , geodesy , quantum mechanics , geography
Summary Standard macroeconomic theory predicts rapid responses of asset prices to monetary policy shocks. Small‐scale vector autoregressions (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.