Monetary Policy and Asset Valuation

Francesco Bianchi, Martin Lettau, Sydney C. Ludvigson

NBER Working Paper No. 22572
Issued in August 2016, Revised in June 2018
NBER Program(s):Asset Pricing Program, Economic Fluctuations and Growth Program, Monetary Economics Program

We find evidence of infrequent shifts, or “regimes,” in the mean of the asset valuation variable cay_t that are strongly associated with low-frequency fluctuations in the real federal funds rate, with low policy rates associated with high asset valuations, and vice versa. There is no evidence that infrequent shifts to high asset valuations are associated with higher expected economic growth or lower economic uncertainty; indeed, the opposite is true. Additional evidence shows that regimes of low interest rates and high asset valuations are characterized by lower equity market risk premia and monetary policy that is less responsive to inflation.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w22572

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