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...tments of monetary policy. Indeed, the Federal Open Market Committee (FOMC) meets only every six weeks, and the Federal Funds Target rate is usually changed by at least 25 basis points at a time. Instead, one can think of these small daily movements as reflecting the change in the probability of a discretionary change in the policy rate at the next FOMC meeting. When interpreted in this way, the results indicate that a 5 % drop in the S&P 500 index increases the probability of a 25 basis point interest rate cut by about 1The term ’pre-crisis consensus’is coined by Bini Smaghi (2009). See also Issing (2011) and Mishkin (2010) for further discussion of this ’consensus’. one third, while a rise in stock prices leads to no significant monetary policy reaction. To evaluate the robustness of our results, we further use a monthly dataset spanning the same sample period to estimate a Taylor rule augmented with stock prices. This exercise confirms the finding of an asymmetric policy reaction to stock price movements. The estimated response to stock price drops is in the same region, though somewhat larger, than our estimate from the highfrequency study. The result is consistent with the findings in a re...

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...more so as a consequence of the financial crisis (Mishkin 2010). “In the end, my main conclusion so far from the crisis, applied the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best-practice monetary policy before, during, and after the financial crisis.” (Svensson 2009, p. 7). This statement obviously immunizes the strategy against any critique. And stating that a strategy should fulfill these demanding conditions, i.e. using all information etc. comes close to a tautology (Issing 2011). This argument is supported by the history of this approach which started from a straightforward concept connecting decisions of the central bank on the interest rate directly with the results of the inflation forecast to “inflation targeting with judgment” and finally “flexible inflation targeting” which leaves the door wide open to further refinements. This by itself does not deserve critique, quite the opposite. Any policy approach should be designed in a way that is robust in an environment of uncertainty and open to take into account changes in the structure of the economy, innovations i...

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...more so as a consequence of the financial crisis (Mishkin 2010). “In the end, my main conclusion so far from the crisis, applied the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best-practice monetary policy before, during, and after the financial crisis.” (Svensson 2009, p. 7). This statement obviously immunizes the strategy against any critique. And stating that a strategy should fulfill these demanding conditions, i.e. using all information etc. comes close to a tautology (Issing 2011). This argument is supported by the history of this approach which started from a straightforward concept connecting decisions of the central bank on the interest rate directly with the results of the inflation forecast to “inflation targeting with judgment” and finally “flexible inflation targeting” which leaves the door wide open to further refinements. This by itself does not deserve critique, quite the opposite. Any policy approach should be designed in a way that is robust in an environment of uncertainty and open to take into account changes in the structure of the economy, innovations i...

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...to low and stable inflation in order to gain a much greater safety margin against deflation would appear to be misguided and possibly de-stabilizing (see Blanchard et al. 2010 for such a proposal and =-=Issing 2011-=- for a rebuttal). At the time of writing of this paper, the euro area remains mired in its own sovereign debt crisis. While euro area sovereigns’ finances have certainly been impacted by the banking r...