NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Monetary Policy and Asset Valuation

Francesco Bianchi, Martin Lettau, Sydney C. Ludvigson

NBER Working Paper No. 22572
Issued in August 2016, Revised in January 2020
NBER Program(s):Asset Pricing Program, Economic Fluctuations and Growth Program, Monetary Economics Program

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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Document Object Identifier (DOI): 10.3386/w22572

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