Working Papers

2017-09 | May 2017


The Time-Varying Effect of Monetary Policy on Asset Prices


This paper estimates the time-varying responses of stock and house prices to changes in monetary policy in the United States. To this end, I augment a time-varying vector autoregressive model (VAR) with a series of monetary policy surprises obtained from federal funds futures, as a proxy for structural monetary policy shocks. The series of surprises enters the model as an exogenous variable and I show analytically that this approach gives identical relative impulse responses compared with an identification that uses the proxy as an external instrument within a constant parameter VAR. However, the exogenous variable approach allows for a convenient and tractable extension to a time-varying parameter VAR that is estimated with standard Bayesian methods. The results show that stock and house prices have been less responsive to monetary policy shocks during periods of high and rising asset prices. Moreover, I find that attempts by the Federal Reserve to lean against the house price boom before the Great Recession would have come with the risk of large deviations from its output target.

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Article Citation

Paul, Pascal. 2017. "The Time-Varying Effect of Monetary Policy on Asset Prices," Federal Reserve Bank of San Francisco Working Paper 2017-09. Available at