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Asset prices, financial amplification and monetary policy: Structural evidence from an identified multivariate GARCH model

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  • Herwartz, Helmut
  • Roestel, Jan

Abstract

We investigate feedback relations among asset prices and financial institutions and identify associated monetary policy effects within a system of US nonfinancial firms, real estate, banks and treasury bonds between January 1997 and April 2019. For this purpose, we propose a novel ‘economic’ identification approach to the contemporaneous modeling of conditionally heteroscedastic financial data. While financial amplification characterizes the relation between real estate and banks during the great financial crisis, such effects have been absent among stocks and financial institutions during the dotcom crisis. Interestingly, policy effects are especially strong during most intense market downturns. Moreover, policy sensitivity of asset prices starts increasing long before the actual burst of the bubble.

Suggested Citation

  • Herwartz, Helmut & Roestel, Jan, 2022. "Asset prices, financial amplification and monetary policy: Structural evidence from an identified multivariate GARCH model," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:intfin:v:78:y:2022:i:c:s1042443122000531
    DOI: 10.1016/j.intfin.2022.101568
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    More about this item

    Keywords

    Narrative identification; Contagion; Volatility models; Monetary policy; Financial crisis;
    All these keywords.

    JEL classification:

    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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