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Joel Peress – INSEAD
25 September 2020 @ 11:00 am - 12:30 pm
We propose a novel theory and supporting empirical evidence that lower long term interest rates (e.g., due to “quantitative easing”) can harm informational and allocative efficiency. We develop a rational expectations equilibrium model in which the interest rate is determined endogenously and utilized by investors to update their beliefs. Interest rates reveal information about discount rates, allowing investors to more precisely infer information about fundamentals from stock prices. The strength of this mechanism and price informativeness are increasing in the interest rate and bond supply. We discuss the impact of unconventional monetary policy on price informativeness, allocative efficiency, and asset prices.