A new study in the latest issue of The Journal of Finance assesses the impact of changes in monetary policy on equity prices. The study measures the average reaction of the stock market in order to understand the economic sources of that reaction. The authors found that, on average, a hypothetical unanticipated 25 basis-point cut in the federal funds rate target is associated with roughly a 1 percent increase in broad stock indexes. Of the three possible reasons for this reaction--a decrease in expected future dividends, a rise in the future expected real interest rates used to discount those dividends, or an increase in expected excess returns associated with holding stocks--the impact on excess returns appears to account for the largest share of stock prices' response.
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This study is published in the current issue of The Journal of Finance. Media wishing to receive a PDF of this article please contact journalnews@bos.blackwellpublishing.net
The Journal of Finance publishes leading research across all the major fields of financial research. It is the most widely cited academic journal on finance and one of the most widely cited journals in all of economics as well. For more information on the journal and the American Finance Association, visit www.afajof.org
Kenneth N. Kuttner Oberlin College and National Bureau of Economic Research
Professor Kuttner can be contacted for questions and interviews.
Ben S. Bernanke Board of Governors of the Federal Reserve System and Princeton and National Bureau of Economic Research
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