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Can the Fed talk the Hind Legs off the Stock Market? (replaces CentER DP 2011-072)

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Author Info

  • Eijffinger, S.C.W.
  • Mahieu, R.J.
  • Raes, L.B.D.

    (Tilburg University, Center for Economic Research)

Abstract

Abstract: Central banks in fluence financial markets' expectations of its future policy. By providing its stance on the prospects of the economy, rationalizing past decisions or announcing future actions, central banks affect financial markets' forecasts. In bad times monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion the effect is weak and on average negative. The response of equities to central bank talk depends critically on the business cycle. There are strong industry specific effects of monetary policy actions and communication. These industry effects relate to the variation in cyclicality of different industries. Firmspecific effects of monetary policy relate to the leverage, the size and the price-earnings ratio of firms.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2012-012.

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Date of creation: 2012
Date of revision:
Handle: RePEc:dgr:kubcen:2012012

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Web page: http://center.uvt.nl

Related research

Keywords: Monetary policy; Federal Reserve Communication; Credit channel; Business cycle; Stock market;

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References

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Cited by:
  1. Kontonikas, Alexandros & MacDonald, Ronald & Saggu, Aman, 2013. "Stock market reaction to fed funds rate surprises: State dependence and the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4025-4037.

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