Market analysts often forecast changes in stock prices by comparing earnings-price ratios on stocks to nominal interest rates. This paper shows that stock prices have followed inflation more closely than interest rates over the last thirty years. This result has implications for recent stock...

In inflation targeting (IT) regimes, the Monetary Authority announces an explicit objective, the target for inflation. However, other objectives that possibly conflict with the inflation goal are present, such as keeping output close to its potential level and the stability of financial markets....

This paper studies the time variation of the Federal Reserve’s inflation target between 1960 and 2004 using both macro and yield curve data. I estimate a New Keynesian dynamic stochastic general equilibrium model in which the inflation target follows a random-walk process. I compare estimation...

We determine optimal monetary policy under commitment in a forward-looking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S....

We examine the usefulness of the spreads between the e/p ratio of the S&P 500 index and the yields on 3-month and 10-year Treasury securities as indicators of future market conditions. We find that while spreads are not particularly useful in a regression framework, the extreme values of the...

This paper links the term structure to perceptions of monetary policy. Long-horizon forecasts of short rates needed in empirical term structure models are heavily influenced by the endpoints, or limiting conditional forecasts, of the short rate process. Mean-reversion or unit roots are commonly...