Monetary Policy and Asset Valuation
The U.S. economy is characterized by large, longer term regime shifts in asset values relative to macroeconomic fundamentals. These movements coincide with shifts in the real federal funds rate in excess of a measure of the natural rate of interest, and in equity market return premia. We specify and estimate a novel DSGE model and find that the regime shifts coincide with equally important shifts in the parameters of a monetary policy rule that have long-lasting effects on the real rate of interest. Changes in the conduct of monetary policy also affect return premia, in the direction consistent with a reach for yield.
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