Amsterdam Econometrics Seminars and Workshop Series

Speaker(s)
Leandro Magnusson (The University of Western Australia)
Date
Friday, 26 October 2018
Location
Amsterdam

We study how monetary policy impacts stock market returns, and vice versa under different communication regimes employed by the Fed. We cast this problem in a method of moments framework, where the moment conditions are derived from a simple structural vector autoregression model. Based on this representation, we can apply the generalised-S test of Magnusson and Mavroeidis (2014}, which exploit the exogenous variation in the variance of the structural shocks to perform inference of the structural stable parameters. By inverting this test, we simultaneously construct a confidence region for both impacts, without the need for restrictive identification assumptions. For the USA economy, we find a statistically insignificant stock market response to changes in monetary policy and a time-dependant monetary policy response to changes in stock prices.