This article investigates the reaction of the Federal Reserve to developments in the stock market. The issue is analysed by first constructing an Index of Stock Price Misalignment (ISPM) in which the fundamental value of the stocks is computed on the basis of the discounted cash flow approach...

International capital market convergence reduces the ability for monetary authorities to set domestic monetary conditions. Traditionally, monetary policy transmission is channelled through the short-term interest rate. Savings and investment decisions are effected through the response of the...