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On Stock Market Returns and Monetary Policy


  • Willem Thorbecke

    (The Jerome Levy Economics Institute)


Boudoukh, Richardson, and Whitelaw (BRW) presented theoretical and empirical evidence explaining the expected inflation/stock return correlation. In concluding they stated that whether monetary policy has real effects is an open question. This paper addresses this question by examining how BRW's industry stock return data respond to monetary policy shocks. Monetary policy is measured by innovations in the federal funds rate and nonborrowed reserves, by narrative indicators, and by an event study of Federal Reserve policy changes. In every case the evidence indicates that expansionary policy increases ex-post stock returns. Results from estimating a multi-factor model also indicate that exposure to monetary policy increases an asset's ex-ante return.

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  • Willem Thorbecke, 1998. "On Stock Market Returns and Monetary Policy," Macroeconomics 9812009, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9812009 Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 35; figures: included

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    References listed on IDEAS

    1. Campbell, John Y & Ammer, John, 1993. " What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance, American Finance Association, vol. 48(1), pages 3-37, March.
    2. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    3. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    4. Thorbecke, Willem & Alami, Tarik, 1994. "The effect of changes in the federal funds rate target on stock prices in the 1970s," Journal of Economics and Business, Elsevier, vol. 46(1), pages 13-19, February.
    5. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    6. James Tobin, 1977. "Monetary Policies and the Economy -- The Transmission Mechanism," Cowles Foundation Discussion Papers 456, Cowles Foundation for Research in Economics, Yale University.
    7. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    8. Willem Thorbecke & Lee Coppock, 1995. "Monetary Policy, Stock Returns, and the Role of Credit in the Transmission of Monetary Policy," Economics Working Paper Archive wp_133, Levy Economics Institute.
    9. Stulz, Rene M, 1986. " Asset Pricing and Expected Inflation," Journal of Finance, American Finance Association, vol. 41(1), pages 209-223, March.
    10. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds," NBER Working Papers 4699, National Bureau of Economic Research, Inc.
    11. Boschen, John F & Mills, Leonard O, 1995. "The Relation between Narrative and Money Market Indicators of Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 33(1), pages 24-44, January.
    12. Campbell, John Y & Mei, Jianping, 1993. "Where Do Betas Come From? Asset Price Dynamics and the," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 567-592.
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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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