Keywords: Monetary policy, asset pricing, stock returns, bond yields
Abstract: This study pursues two addenda to the practitioner and academic on the
effect of monetary policy on asset prices. First, this paper applies cointegration
theory, and, second, relaxes the stringent assumption in the literature that changes
in 10-year Treasury yields, stock returns, and changes in the stance of monetary
policy are exogenous. Given quarterly data from 1978:Q4 to 2002:Q3, two-stage least
squares (2SLS) regressions suggest that changes in the exogenous component of the
federal funds rate affect changes in Treasury yields but not stock returns, ceteris
paribus. However, this result is sensitive to alternative proxies for the stance
of monetary policy. Also, little evidence suggests that monetary policy responds
to the exogenous components of changes in financial asset prices.
Full paper (219 KB PDF)
Home | FEDS | List of 2003 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: March 27, 2003