The Response of Equity Prices to Movements in Long-Term Interest Rates Associated with Monetary Policy Statements: Before and after the Zero Lower Bound

25 Pages Posted: 9 Apr 2013

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Date Written: January 18, 2013

Abstract

Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing. We propose a strategy to identify the comovement between interest rate and equity price movements induced by monetary policy when an observable representing policy changes, such as changes in the interbank rate, is not available. A decline in long-term interest rates induced by monetary policy statements prior to 2009 is accompanied by a 6- to 9-percent increase in equity prices. This association is substantially attenuated in the period since the zero-lower bound has been binding - with a policy-induced 100 basis-point decline in 10-year Treasury yields associated with a 1½- to 3-percent increase in equity prices. Empirical analysis suggests this attenuation does not represent a change in responses to monetary-policy induced movements in interest rates, but reflects the importance of both short- and long-term interest rates.

Keywords: Monetary policy, stock market

JEL Classification: E52, G14

Suggested Citation

Kiley, Michael T., The Response of Equity Prices to Movements in Long-Term Interest Rates Associated with Monetary Policy Statements: Before and after the Zero Lower Bound (January 18, 2013). FEDS Working Paper No. 2013-15. Available at SSRN: https://ssrn.com/abstract=2246893 or http://dx.doi.org/10.2139/ssrn.2246893

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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