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Monetary Policy and Asset Prices

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Chicago Ballroom VIII
Hosted By: American Finance Association
  • Chair: Annette Vissing-Jorgensen, University of California-Berkeley

Does Central Bank Tone Move Asset Prices?

Maik Schmeling
,
City University London
Christian Wagner
,
Copenhagen Business School

Abstract

We explore whether the tone of central bank communication matters for asset
prices and find that tone changes have a signicant effect on equity returns. Stock
prices increase when tone becomes more positive and vice versa. Moreover, we
find that positive tone changes are associated with increasing bond yields, lower
implied equity volatility, lower variance risk premia, and lower credit spreads.
Since we also show that tone changes are largely unrelated to current and future
economic fundamentals, our results suggest that central bank tone matters for
asset prices through a risk-based channel.

Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy

Wenxin Du
,
Federal Reserve Board
Carolin Pflueger
,
University of British Columbia
Jesse Schreger
,
Princeton University

Abstract

Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more procyclical inflation, where nominal debt provides less consumption-smoothing, issue more local-currency debt. We propose that the effect of monetary policy credibility on nominal bond risk premia is an important determinant of the currency composition of sovereign debt. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, showing that countries with higher nominal bond-stock betas have significantly larger nominal bond risk premia and borrow less in local currency.

Monetary Policy Through Production Networks: Evidence From the Stock Market

Ali Ozdagli
,
Federal Reserve Bank of Boston
Michael Weber
,
University of Chicago

Abstract

Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct (demand) effect and an indirect (network) effect. We attribute 50%--85% of the overall effect to indirect effects. The decomposition is robust to different sample periods, event windows, and types of announcements. Direct effects are larger for industries selling most of the industry output to end-consumers compared to other industries. We find similar evidence of large indirect effects using ex-post realized cash-flow fundamentals. A simple model with intermediate inputs guides our empirical methodology. Our findings indicate production networks might be an important propagation mechanism of monetary policy to the real economy.
Discussant(s)
Marco Di Maggio
,
Harvard University and NBER
Adrien Auclert
,
Stanford University
Bernard Herskovic
,
University of California-Los Angeles
JEL Classifications
  • G1 - Asset Markets and Pricing