The Importance of Stock Market Returns in Estimated Monetary Policy Rules: A Structural Approach

Jesús Vázquez, Universidad del País Vasco

Abstract

This paper estimates a standard version of the New Keynesian Monetary (NKM) model in order to study the role played by stock market returns in the estimated U.S. monetary policy rule. The estimation procedure implemented is a classical structural method based on the indirect inference principle. The estimation results show that the Fed responds to stock market returns in addition to the standard macroeconomic indicators only under a backward-looking Taylor rule suggesting that monetary policy does not react independently to stock returns.