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Estrogen therapy (ET) seems to differentially effect cognitive processes in younger versus older postmenopausal women, suggesting a window of opportunity when ET is most beneficial. Cognitive improvement in younger postmenopausal women has been attributed to ET's influence on hot flushes and sleep, but empiric examination of the mediating role of menopause symptoms versus direct effects of ET on the brain is limited.In a double-blind trial, 52 women were randomly assigned to estradiol 0.05 mg/day (n = 26) or placebo transdermal patches (n = 26) for 12 weeks. Women completed tests of memory, learning, and executive functioning, and hot flush and sleep assessments at baseline and study end. A subset of women (five ET treated, six placebo treated) also underwent blood oxygenation level-dependent (BOLD) functional magnetic resonance imaging (fMRI) studies.Nondepressed perimenopausal and postmenopausal women were studied. The majority had hot flushes and sleep impairment. Compared with placebo, ET selectively reduced errors of perseveration during verbal recall (P = 0.03), a frontal system-mediated function, but did not influence other cognitive processes. Women with baseline hot flushes had greater cognitive benefit with ET (P < 0.05). Cognitive benefit was not associated with sleep problems or its improvement. Measures of fMRI BOLD activation during tests of verbal and spatial working memory showed significant increases in frontal system activity with ET (P < 0.001).Estrogen therapy selectively improves executive functioning as demonstrated by reduced perseverative errors and prefrontal cortex activation during verbal recall tasks. Cognitive improvement with ET is associated with hot flushes, but not with sleep, suggesting that ET has a direct central nervous system effect, rather than an indirect effect mediated through improvement of sleep.