The interaction of monetary policy and stock returns”, The

1This paper has benefitted from the comments of Darren Grant and Mark Wohar. The suggestions of an anonymous referee improved the paper substantially. Any remaining errors are the sole responsibility of the author. The ”irrational exuberance ” of the stock market in the late 1990’s lead to a discussion of the appropriate policy response by monetary authorities. Any response would be contingent on the stock market reaction to policy shocks. In this study I employ a structural VAR to estimate the response of the stock market returns to innovations in the federal funds rate. The effect of the stock market on Federal Reserve policy changes can also be examined from the empirical methodology.