Monetary Policy and the Stock Market: Some International evidence

This paper investigates the impact of monetary policy on stock returns in thirteen OECD countries over the period 1972-2002. Our results indicate that monetary policy shifts significantly affect stock returns, thereby supporting the notion of monetary policy transmission via the stock market. Our contribution with respect to previous work is threefold. First, we show that our findings are robust to various alternative measures of stock returns. Second, our inferences are adjusted for the non-normality exhibited by the stock returns data. Finally, we take into account the increasing co-movement among international stock markets. The sensitivity analysis indicates that the results remain largely unchanged.

[1]  M. Gertler,et al.  The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence , 1993 .

[2]  Marco Del Negro,et al.  The Rise in Comovement Across National Stock Markets: Market Integration or it Bubble? , 2002 .

[3]  Claudio Morana,et al.  Monetary Policy and the Stock Market in the Euro Area , 2004, SSRN Electronic Journal.

[4]  James R. Booth,et al.  Economic Factors, Monetary Policy, and Expected Returns on Stocks and Bonds , 1997 .

[5]  Edward Nelson.  UK Monetary Policy 1972-97: A Guide Using Taylor Rules , 2001 .

[6]  Gerald R. Jensen,et al.  Monetary environments and international stock returns , 1999 .

[7]  E. Fama.  Stock Returns, Real Activity, Inflation, and Money , 1981 .

[8]  E. Fama,et al.  BUSINESS CONDITIONS AND EXPECTED RETURNS ON STOCKS AND BONDS , 1989 .

[9]  Kenneth N. Kuttner,et al.  Federal Reserve Bank of New York Staff Reports What Explains the Stock Market's Reaction to Federal Reserve Policy? What Explains the Stock Market's Reaction to Federal Reserve Policy? , 2003 .

[10]  T. Andersen.  THE ECONOMETRICS OF FINANCIAL MARKETS , 1998, Econometric Theory.

[11]  E. Fama,et al.  Short-Term Interest Rates as Predictors of Inflation , 1975 .

[12]  B. Bernanke,et al.  Agency Costs, Net Worth, and Business Fluctuations , 1988 .

[13]  John B. Taylor.  Discretion versus policy rules in practice , 1993 .

[14]  Kunio Okina,et al.  Imes Discussion Paper Series Institute for Monetary and Economic Studies Bank of Japan the Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons , 2022 .

[15]  T. Day.  Asset returns and inflation , 1981 .

[16]  Charles Goodhart,et al.  Financial Variables and the Conduct of Monetary Policy , 2000 .

[17]  Gerald R. Jensen,et al.  Business conditions, monetary policy, and expected security returns , 1996 .

[18]  S. Ross,et al.  Economic Forces and the Stock Market , 1986 .

[19]  Willem Thorbecke.  On Stock Market Returns and Monetary Policy , 1997 .

[20]  A. Patelis.  Stock Return Predictability and The Role of Monetary Policy , 1997 .

[21]  Stephen G. Cecchetti.  Asset prices and central bank policy , 2000 .

[22]  B. Bernanke,et al.  Inside the Black Box: The Credit Channel of Monetary Policy Transmission , 1995 .

[23]  Ben S. Bernanke,et al.  Should Central Banks Respond to Movements in Asset Prices , 2001 .

[24]  Gerald R. Jensen,et al.  Discount rate changes and security returns in the U.S., 1962–1991 , 1995 .

[25]  C. Ioannidis,et al.  Should Monetary Policy Respond to Asset Price Misalignments , 2005 .

[26]  Leonard O. Mills,et al.  THE RELATION BETWEEN NARRATIVE AND MONEY MARKET INDICATORS OF MONETARY POLICY , 1995 .

[27]  B. Bernanke,et al.  Monetary Policy and Asset Price Volatility , 2000 .

[28]  Roger N. Waud.  Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the 'Announcement Effect' , 1970 .