Monetary Policy and Asset Valuation

Francesco Bianchi, Martin Lettau and Sydney Ludvigson

No 12275, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We document large, longer-term, joint regime shifts in asset valuations and the real federal funds rate-r^{∗} spread. To interpret these findings, we estimate a novel macro-finance model of monetary transmission and find that the documented regimes coincide with shifts in the parameters of a policy rule, with long-term consequences for the real interest rate. Estimates imply that two-thirds of the decline in the real interest rate since the early 1980s is attributable to regime changes in monetary policy. The model explains how infrequent changes in the monetary policy stance can generate persistent changes in asset valuations and the equity premium.

Keywords: Monetary policy; Asset pricing; Real interest rate; risk premium (search for similar items in EconPapers)
JEL-codes: G10 G12 G17 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Monetary Policy and Asset Valuation (2022)
Working Paper: Monetary Policy and Asset Valuation (2018)
Working Paper: Monetary Policy and Asset Valuation (2017)
Working Paper: Monetary Policy and Asset Valuation (2016)
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