Monetary Policy and Stock Market Volatility

13 Pages Posted: 21 Jun 2016

See all articles by Dirk Bleich

Dirk Bleich

Deutsche Bundesbank

Ralf Fendel

WHU Otto Beisheim Graduate School of Management

Jan-Christoph Rülke

WHU - Otto Beisheim School of Management

Date Written: 2013

Abstract

We estimate forward-looking interest rate reaction functions in the spirit of Taylor (1993) for four major central banks augmented by implicit volatilities of stock market indices to proxy financial market stress. Our results suggest that the Bank of England, the Federal Reserve Bank and the European Central Bank systematically respond to an increase of the implicit volatility by a decrease in the interest rate. We take our results as strong evidence that central banks use interest rates to stabilize financial markets in periods of financial market stress.

Keywords: Monetary policy, Taylor rule, Asset prices

JEL Classification: E43, E58, G12

Suggested Citation

Bleich, Dirk and Fendel, Ralf and Rülke, Jan-Christoph, Monetary Policy and Stock Market Volatility (2013). Bundesbank Discussion Paper No. 45/2013, Available at SSRN: https://ssrn.com/abstract=2796936 or http://dx.doi.org/10.2139/ssrn.2796936

Dirk Bleich (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Ralf Fendel

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Jan-Christoph Rülke

WHU - Otto Beisheim School of Management

Burgplatz 2
Vallendar, 56179
Germany

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