Overvalued US stocks weaken FCIs’ signal effects – ECB research
Policy-makers should not be blinded by inflated equity prices, authors say
Overvalued US equities are weakening the effects of monetary policy tightening, new research from the European Central Bank shows.
In a study released today (June 17), ECB economists Cajsa Klass and Ana-Simona Manu examine financial condition indexes (FCIs) and stock prices in the US.
They find that the adverse effect of a tightening FCI on US activity is “considerably weaker” when the equity market is overvalued.
The researchers note that despite having fallen from a peak cyclically adjusted price
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