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Monetary Policy and Asset Valuation

Author

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  • Bianchi, Francesco
  • Lettau, Martin
  • Ludvigson, Sydney

Abstract

We find evidence of infrequent shifts, or "regimes" in the mean of the asset valuation variable cayt 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.

Suggested Citation

  • Bianchi, Francesco & Lettau, Martin & Ludvigson, Sydney, 2018. "Monetary Policy and Asset Valuation," CEPR Discussion Papers 12671, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12671
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    References listed on IDEAS

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    Cited by:

    1. Oguzhan Cepni & Rangan Gupta & Mark E. Wohar, 2019. "Variants of Consumption-Wealth Ratios and Predictability of U.S. Government Bond Risk Premia: Old is still Gold," Working Papers 201912, University of Pretoria, Department of Economics.
    2. Andrew Filardo & Paul Hubert & Phurichai Rungcharoenkitkul, 2019. "The reaction function channel of monetary policy and the financial cycle," Documents de Travail de l'OFCE 2019-16, Observatoire Francais des Conjonctures Economiques (OFCE).

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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