Identifying theinterdependencebetweenUSmonetarypolicy and thestockmarket$

WeestimatetheinterdependencebetweenUSmonetarypolicyandtheS&P500using structuralvectorautoregressive(VAR)methodology.Asolutionisproposedtothe simultaneityproblemofidentifyingmonetaryandstockpriceshocksbyusinga combinationofshort-runandlong-runrestrictionsthatmaintainsthequalitative properties ofamonetarypolicyshockfoundintheestablishedliterature[Christiano,L.J., Eichenbaum,M.,Evans,C.L.,1999.Monetarypolicyshocks:whathavewelearnedandto what end?In:Taylor,J.B.,Woodford,M.(Eds.),HandbookofMacroeconomics,vol.1A. Elsevier,NewYork,pp.65–148].Wefindgreatinterdependencebetweentheinterest ratesettingandrealstockprices.Realstockpricesimmediatelyfallbyseventonine percent duetoamonetarypolicyshockthatraisesthefederalfundsrateby100basis points.Astockpriceshockincreasingrealstockpricesbyonepercentleadstoan increase intheinterestrateofcloseto4basispoints.