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Monetary Policy and Asset Valuation
Author(s) -
BIANCHI FRANCESCO,
LETTAU MARTIN,
LUDVIGSON SYDNEY C.
Publication year - 2022
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13107
Subject(s) - economics , monetary policy , interest rate , asset (computer security) , equity (law) , monetary economics , valuation (finance) , real economy , yield curve , credit channel , real interest rate , inflation targeting , finance , computer security , computer science , law , political science
ABSTRACT We document large, longer term, joint regime shifts in asset valuations and the real federal funds rate‐ r * $r^{\ast }$ 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.