DP8450 Can the Fed talk the hind legs off the stock market?

Author(s): Sylvester C W Eijffinger, Ronald J Mahieu, Louis Raes
Publication Date: June 2011
Keyword(s): business cycle, credit channel, monetary policy, monetary policy announcements, stock market
JEL(s): E44, E52, G14
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8450

Deliberately or not, by providing its stance on the prospects of the economy, rationalizing past decisions or announcing future actions, central banks influence financial markets' expectations of its future policy. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion the effect is weak and on average negative. The response of equities to central bank talk depends critically on the business cycle. There are strong industry specific effects of monetary policy actions and communication. These industry effects relate to the variation in cyclicality of different industries. Firm-specific effects of monetary policy relate to the leverage, the size and the price-earnings ratio of firms.