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Federal Reserve Private Information and the Stock Market

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  • Lakdawala, Aeimit
  • Schaffer, Matthew

Abstract

We study the response of stock prices to monetary policy, distinguishing the effects of exogenous policy actions from ``Delphic" actions that reveal the Federal Reserve's macroeconomic forecasts. To decompose composite monetary policy surprises into these separate components, we exploit differences in central bank and private sector forecasts to construct a measure of Federal Reserve private information. Contractionary monetary policy shocks of either type cause a fall in stock prices with exogenous shocks having a larger negative effect. However there is an important asymmetry; when FOMC meetings are unscheduled or when the fed funds rate reverses direction, stock prices actually rise in response to a contractionary Delphic shock.

Suggested Citation

  • Lakdawala, Aeimit & Schaffer, Matthew, 2016. "Federal Reserve Private Information and the Stock Market," MPRA Paper 77608, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:77608
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    More about this item

    Keywords

    Monetary Policy Shocks; Stock Prices; Federal Reserve Private Information;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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