Does the ECB respond to the stock market?

W.J. Wouter Botzen, Philip S. Marey

Research output: Working paperProfessional

15 Downloads (Pure)

Abstract

The role of asset prices in monetary policy has been widely debated. This paper examines the role that stock prices play in the monetary policy of the ECB. For this purpose, standard and augmented forward-looking Taylor rules are estimated for the ECB using monthly data between 1999 and 2005. Of special interest is the impact of adding stock prices to the standard Taylor rule of the ECB. The GMM estimations of a standard Taylor rule and augmented Taylor rules for the Euro area indicate that the ECB considered stock price developments in setting interest rates. Monetary policy of the ECB stabilized asset prices by raising interest rates when the stock market index was above average and lowering rates when the index was below average. Stock prices are not only relevant as instruments but also as arguments in the ECB policy rule. The empirical plausibility of the Taylor rule improves when it allows for a reaction to the stock market. These results challenge previous studies.
Original languageEnglish
Place of PublicationAmsterdam
PublisherFaculty of Economics and Business Administration, Vrije Universiteit Amsterdam
Publication statusPublished - 2006

Publication series

NameResearch Memorandum
No.2006-17

Fingerprint

Dive into the research topics of 'Does the ECB respond to the stock market?'. Together they form a unique fingerprint.

Cite this