INTERNATIONAL EVIDENCE ON EQUITY PRICES, INTEREST-RATES AND MONEY

In this article, I estimate the dynamic response of output and asset p rices - bond yields and real equity price indices - to money supply sh ocks in eight industrialized economies over the post-war period. To id entify money supply shocks, I assume only that such shocks are neutral in the long-run. The reliability of this identification procedure is examined in light of the recent critique by Faust and Leeper. The find ings indicate that a real liquidity effect exists in both bond and sto ck markets, for most of the countries in the sample, although there is substantial variation in the magnitudes of the effects across countri es. The response of real equity prices to money supply innovations has not been well-documented in the literature, and has typically been ig nored in the debate over the monetary transmission mechanism. The impo rtance of these findings lies in suggesting ways to improve our unders tanding of the monetary transmission mechanism and the role of asset m arkets. (C) 1998 Elsevier Science Ltd. All rights reserved.