Before The Investment Analysts Society of Chicago, Chicago, Illinois
April 15, 2004
What Policymakers Can Learn from Asset Prices
Central bankers naturally pay close attention to interest rates and asset prices, in large part because these variables are the principal conduits through which monetary policy affects real activity and inflation. But policymakers watch financial markets carefully for another reason, which is that asset prices and yields are potentially valuable sources of timely information about economic and financial conditions. Because the future returns on most financial assets depend sensitively on economic conditions, asset prices--if determined in sufficiently liquid markets--should embody a great deal of investors' collective information and beliefs about the future course of the economy. ...