The Relationship Between Monetary Policies And Stock Markets

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In this section, it will state the details of Taylor rules which used in this research, Taylor rules is a tool to identify the relationship between monetary policies and stock markets, which formulated as: in this formula, indicates the interest rate that set by the Japanese central bank, in the dataset, it is shown as the log of federal funds rate(logffr), indicates the rate of inflation while means the desired rate of inflation which always treated as zero. is the level of output while indicates the potential output, it is easy to generated in Eviews and calculated the output gap ). Taylor rules is treated as a strong and easy way to analysis the monetary policies, nonetheless, it did not take asset price movement into account while the movement is one of the most important elements to shape monetary policy. So in this study, the formula of Taylor rule should be re-wrote as follows where n represents the number of lags of asset price volatility to be introduced to model the monetary influence. Based on the Taylor rule model, it requires the data over a period, in this study, the data was collected range from 1984Q1 to 2012Q4. The variables included in the dataset are: GDP, which is the real GDP of Japan, Nikkei, which is the Japan’s stock market index. The CPI is stand for the consumer price index of Japan, and the interest rate which set by Japanese central bank. In the Eviews, the dataset should be re-calculate to fit the Taylor rule model formula, as mentioned
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