The Fed's Reaction to Asset Prices

Zeno Rotondi *	Giacomo Vaciago *
Capitalia, Roma Università di Ferrara	Università Cattolica del Sacro Cuore, Milano

Should central banks react to stock market prices? This pro blem has become fashionable again after the bubble of the 1990s and the following recession: if the Fed had reacted earlier to con tain the sharp growth in stock prices, might macroeconomic sta bilization have been achieved? We present a new set of estimates showing that the Fed did react to stock market prices in the period 1988-2003. In particular, we find a significant lagged response for both real-time data and ex post revised data, as we would expect from a stabilizing leaning-against-the-wind approach. [JEL Classification: D84, E44, E52, E58, G12].

* zeno.rotondi@capitalia.it and z.rotondi@economia.unife.it ;
* giacomo.va-ciago@unicatt. it
The Authors wish to thank Simon Benninga, Athanasios Orphanides, Ron Smith, and two anonymous referees for helpful comments. The Authors are grateful to Brian Sack and Robert Shiller for having kindly provided part of the data used in the present analysis. The usual disclaimer applies.