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The Effects of Forward Guidance Policy on Equity Markets in Low Interest Environment
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2020 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

I show that the U.S. central bank manages to affect domestic stock markets through unconventional monetary policy when the main interest channel is absent in a zero lower bound environment. I make use of a simple high frequency instrument identification method that builds upon the findings of Bernanke and Kuttner (2005) to disentangle the exogenous part of a monetary policy announcement. Using Eurodollar futures and up to 10-year constant maturity U.S. Treasury-funds to capture the proxy for forward guidance policies, I identify the unexpected path to future monetary policy from an FOMC announcement and estimate its effect on both domestic and foreign equity markets. The main results show that when interest rates are close to zero, a one-percent decrease in 10-year unexpected monetary policy path is on an FOMC announcement day, associated with 2,4 percent increase in the domestic U.S. stock market. The evidence on global equity markets is heterogeneous and disperse.

Place, publisher, year, edition, pages
2020. , p. 42
Keywords [en]
Monetary policy, zero lower bound, asset markets
National Category
Economics
Identifiers
URN: urn:nbn:se:uu:diva-404370OAI: oai:DiVA.org:uu-404370DiVA, id: diva2:1394259
Subject / course
Economics
Educational program
Master Programme in Economics
Supervisors
Available from: 2020-02-18 Created: 2020-02-18 Last updated: 2020-02-18Bibliographically approved

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