Our paper reports the following two findings: 1) In monthly data, bond purchases by the Fed raise bond prices and reduce bond yields. The residual bond-supply to traders is not fully predictable, and this supply-risk adds between 10 and 40 basis points to the standard deviation of the real interest rate on T-bills. 2) The Fed's open market purchases do not raise stock prices or reduce stock returns. If anything, they raise stock returns. More generally, bonds and stocks do not co-move at high frequencies. To explain these two facts, we model the bond and stock markets as spatially separate or 'segmented'. In the model, bond purchases lower bond rates, but they do not affect stock returns, and this is consistent with both facts.
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8597.
Length: Date of creation: Nov 2001 Date of revision: Handle: RePEc:nbr:nberwo:8597
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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
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Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001.
"Interest rates and inflation,"
Working Papers
609, Federal Reserve Bank of Minneapolis.
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Fernando Alvarez & Robert E. Lucas Jr. & Warren E. Weber, 2001.
"Interest Rates and Inflation,"
American Economic Review,
American Economic Association, vol. 91(2), pages 219-225, May.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Ellen R. McGrattan & Edward C. Prescott, 2004.
"The 1929 Stock Market: Irving Fisher Was Right,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 991-1009, November.
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