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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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kurt Graden Lunsford, 2018. "Understanding the Aspects of Federal Reserve Forward Guidance," Working Papers (Old Series) 1815, Federal Reserve Bank of Cleveland, revised 07 Nov 2018.
    2. Lakdawala, Aeimit & Bauer, Michael & Mueller, Philippe, 2019. "Market-Based Monetary Policy Uncertainty," Working Papers 2019-2, Michigan State University, Department of Economics.
    3. Marek Jarocinski & Peter Karadi, 2017. "Central Bank Information Shocks," 2017 Meeting Papers 1193, Society for Economic Dynamics.
    4. Lakdawala, Aeimit, 2018. "The growing impact of US monetary policy on emerging financial markets: Evidence from India," Working Papers 2018-9, Michigan State University, Department of Economics.
    5. Paul Hubert & Fabien Labondance, 2019. "Central bank tone and the dispersion of views within monetary policy committees," Working Papers 2019-08, CRESE.
    6. Paul Rudel & Peter Tillmann, 2018. "News Shock Spillovers: How the Euro Area Responds to Expected Fed Policy," MAGKS Papers on Economics 201832, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

    More about this item

    Keywords

    Monetary Policy Shocks; Stock Prices; Federal Reserve Private Information;

    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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