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Barcelona GSE Working Paper No. 724

Title: The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence
Authors: Jordi Galí, Luca Gambetti
Date: 30-12-2013
Keywords: leaning against the wind policies, financial stability, inflation targeting, asset price booms
JEL Codes: E52, G12
Abstract:
We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which, after a a short-run decline, stock prices increase persistently in response to an exogenous tightening of monetary policy. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.
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