The highly expansionary monetary policies conducted by the Federal Reserve (Fed) and the European Central Bank (ECB) are leading to abnormally strong rises in share prices. This mechanism may be unintentional (the real objective of the expansionary monetary policy is to stimulate demand and improve borrower solvency) or deliberate (to benefit from wealth effects, aid the financial sector). Economists at Natixis carry out an econometric and statistical analysis to find it out.
Key quotes
“The central banks’ objective is to stimulate investment by maintaining the solvency of borrowers, in particular governments. Monetary policy then has the side-effect of giving rise to an equity bubble. This effect is an unintended consequence.”
“The central banks’ objective is to drive up stock market indices to benefit from positive wealth effects on consumption and investment; and to bolster the financial sector (investment funds, institutional investors) by generating capital gains on their assets.”
“Our econometric analysis shows no significant negative effect of growth in the stock market index (year-on-year, quarter-on-quarter or month-on-month) on the central banks’ key interest rates.”
“We compare the monetary base and the stock market index. The evidence is not clear: sometimes a fall in indices has led to monetary expansion (2008 and 2020 in the United States; 2012, 2017 and 2020 in the Eurozone), but other times it has not (2012 and 2016 in the United States; 2008 in the Eurozone)”
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