Monetary Policy and Asset Valuation

Francesco Bianchi; Martin Lettau; Sydney C. Ludvigson

doi:10.1111/jofi.13107

Monetary Policy and Asset Valuation

Francesco Bianchi, Martin Lettau, Sydney C. Ludvigson

Research output: Contribution to journal › Article › peer-review

Abstract

We document large, longer term, joint regime shifts in asset valuations and the real federal funds rate- (Formula presented.) spread. To interpret these findings, we estimate a novel macrofinance model of monetary transmission and find that the documented regimes coincide with shifts in the parameters of a policy rule, with long-term consequences for the real interest rate. Estimates imply that two-thirds of the decline in the real interest rate since the early 1980s is attributable to regime changes in monetary policy. The model explains how infrequent changes in the stance of monetary policy can generate persistent changes in asset valuations and the equity premium.

Original language	English (US)
Pages (from-to)	967-1017
Number of pages	51
Journal	Journal of Finance
Volume	77
Issue number	2
DOIs	https://doi.org/10.1111/jofi.13107
State	Published - Apr 2022

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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10.1111/jofi.13107

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abstract = "We document large, longer term, joint regime shifts in asset valuations and the real federal funds rate- (Formula presented.) spread. To interpret these findings, we estimate a novel macrofinance model of monetary transmission and find that the documented regimes coincide with shifts in the parameters of a policy rule, with long-term consequences for the real interest rate. Estimates imply that two-thirds of the decline in the real interest rate since the early 1980s is attributable to regime changes in monetary policy. The model explains how infrequent changes in the stance of monetary policy can generate persistent changes in asset valuations and the equity premium.",

author = "Francesco Bianchi and Martin Lettau and Ludvigson, {Sydney C.}",

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AB - We document large, longer term, joint regime shifts in asset valuations and the real federal funds rate- (Formula presented.) spread. To interpret these findings, we estimate a novel macrofinance model of monetary transmission and find that the documented regimes coincide with shifts in the parameters of a policy rule, with long-term consequences for the real interest rate. Estimates imply that two-thirds of the decline in the real interest rate since the early 1980s is attributable to regime changes in monetary policy. The model explains how infrequent changes in the stance of monetary policy can generate persistent changes in asset valuations and the equity premium.

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Monetary Policy and Asset Valuation

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