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Article
TRANSMISSION OF MONETARY POLICY TO ASSET PRICES: EVIDENCE USING STOCHASTIC VOLATILITY MODELS
Corina Saman, Monica Raileanu Szeles
ABSTRACT. This paper investigates the stock market reaction to a contractionary monetary policy shock using vector autoregressive models with stochastic volatility. The empirical exercise uses Romanian financial markets data. Model comparisons show that the VAR model with fat tail and heteroscedasticity in innovations are more useful in modelling data compared to the time-varying coefficient model with stochastic volatility. There is clear evidence that structural shocks associated with industrial production, inflation and asset prices are characterized by a non-normal density. The results show that the contractionary monetary policy may fail to reduce the asset price bubble, as stated by the theory of rational bubbles in stock prices.
KEYWORDS: stock market prices, monetary policy transmission, stochastic volatility, non-Gaussian shocks.
JEL classification: C54, E40, E44, E52.