Keywords: Monetary policy, equity prices
Abstract: This paper analyzes the impact of changes in monetary policy on equity prices, with the
objectives both of measuring the average reaction of the stock market and also of
understanding the economic sources of that reaction. We find that, on average, a
hypothetical unanticipated 25-basis-point cut in the federal funds rate target is
associated with about a one percent increase in broad stock indexes. Adapting a methodology
due to Campbell (1991) and Campbell and Ammer (1993), we find that the effects of unanticipated
monetary policy actions on expected excess returns account for the largest part of the
response of stock prices.
Full paper (299 KB PDF)
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Last update: April 1, 2004