The existence of the Tobin’s q effect justifies share purchases by central banks

We show the existence of the Tobin’s q effect: a rise in the market valuation of companies (the ratio between market capitalisation and the value of their capital) leads to an increase in corporate investment in the United States and the euro zone. This may be justif ication for the Federal Reserve and the ECB to follow in the Bank of Japan ’s footsteps and buy equities : It would make monetary policy more expansionary, by boosting corporate investment; It would improve the effectiveness of monetary policy, as the supply side would also be stimulated thanks to the additional productive investment.