Finance and Economics Discussion Series: What Explains the Stock Market's Reaction to Federal Reserve Policy

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.

Author: Ben S. Bernanke,Kenneth N. Kuttner
Publisher: Bibliogov
Published: 02/06/2013
Pages: 60
Binding Type: Paperback
Weight: 0.28lbs
Size: 9.69h x 7.44w x 0.12d
ISBN: 9781288713219

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