Discussion Paper Details

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Title: Monetary Policy and Asset Valuation

Author(s): Francesco Bianchi, Martin Lettau and Sydney Ludvigson

Publication Date: September 2017

Keyword(s): Asset Pricing, monetary policy, Real interest rate and Risk premium

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

Abstract: This paper presents evidence of infrequent shifts, or "regimes," in the mean of the consumption-wealth variable cayt that are strongly associated with low frequency fluctuations in the real value of the Federal Reserve's primary policy rate, with low policy rates associated with high asset valuations, and vice versa. By contrast, there is no evidence that infrequent shifts to high asset valuations and low policy rates are associated with higher economic growth or lower economic uncertainty; indeed the opposite is true. Additional evidence shows that low interest rate/high asset valuation regimes coincide with significantly lower equity market risk premia.

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Bibliographic Reference

Bianchi, F, Lettau, M and Ludvigson, S. 2017. 'Monetary Policy and Asset Valuation'. London, Centre for Economic Policy Research.