Discussion Paper Details

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Title: Monetary Policy and Asset Valuation

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

Publication Date: January 2018


Programme Area(s): Financial Economics, Macroeconomics and Growth and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Bianchi, F, Lettau, M and Ludvigson, S. 2018. 'Monetary Policy and Asset Valuation'. London, Centre for Economic Policy Research.