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  5. Asset Pricing: Inflation and Monetary Policy
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Asset Pricing: Inflation and Monetary Policy

Paper Session

Sunday, Jan. 7, 2024 1:00 PM - 3:00 PM (CST)

Marriott Rivercenter, Grand Ballroom Salon B
Hosted By: American Finance Association
  • Chair: Emil Verner, Massachusetts Institute of Technology

Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock

Christoph Boehm
,
University of Texas-Austin
Niklas Kroner
,
Federal Reserve Board

Abstract

Existing high-frequency monetary policy shocks explain surprisingly small shares of the variation in U.S. stock prices and dollar exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times - even after residualizing with respect to the entire yield curve. Motivated by these observations, we use a heteroskedasticity-based procedure to estimate a "Fed non-yield shock", which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive Fed non-yield shock raises stock prices in the U.S. and around the globe, it depreciates the dollar, it reduces the VIX and many other risk-related measures, and it lowers U.S. convenience yields. Our findings imply that the Fed moves asset prices through channels that are not spanned by the yield curve. These effects are economically significant.

Stagflationary Stock Returns and the Role of Market Power

Ben Knox
,
Federal Reserve Board
Yannick Timmer
,
Federal Reserve Board

Abstract

We study the implications of inflation for firms' performance with a focus on the role of market power. Using inflation announcements for identification, we find that inflationary surprises are associated with persistent declines in stock prices. The results hold controlling for discount rate changes, suggesting that stock market investors have a stagflationary view of the world: nominal cash flows are expected to be stagnant during periods of higher inflation. Consistent with this view, we find firms with more market power are shielded from stagflationary stock returns. These firms are better able to hold prices over marginal costs, generating an increase in their nominal cashflows in response to inflation shocks.

Let the Market Speak: Using Interest Rates to Identify the Fed Information Effect

Linyan Zhu
,
London School of Economics

Abstract

I propose a novel method to disentangle the exogenous monetary shock from the signaling effect of a Fed announcement in real time. The method relies on the different ways monetary news and non-monetary news change the entire short end of the yield curve at high frequency, with the latter informed by market responses to macroeconomic data releases. The estimated revelation of Fed information is strongly correlated with the difference between market forecasts and the Fed’s own forecasts. The monetary shock is found to have a bigger effect on the economy than suggested using an instrument without adjustment for the signaling effect.

Discussant(s)
Moritz Lenel
,
Princeton University
Francesco D'Acunto
,
Georgetown University
Samuel Hanson
,
Harvard University
JEL Classifications
  • G1 - General Financial Markets