It is known that stock returns are affected by monetary policy. This paper theoretically and empirically investigates whether asymmetric information between the Federal Reserve and the public causes the relation between stock returns and monetary policy actions. The paper concludes that asymmetric information between the Federal Reserve and the public is one of the reasons of effects of monetary policy actions on stock returns. A Kalman filter algorithm is constructed to analyze the information and learning dynamics between the Federal Reserve and a representative investor. Stock prices react to monetary policy actions because monetary policy actions reveal the private information that the Fed has about future inflation and output. Investors update their expectations after observing the Fed's actions and that produces a change in stock returns. The findings of the model are empirically investigated using VAR and impulse responses verify the theoretical findings
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Find related papers by JEL classification: E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy G12 - Financial Economics - - General Financial Markets - - - Asset Pricing D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
This paper has been announced in the following NEP Reports: