The impact of monetary policy on stock market bubbles and trading behavior: Evidence from the lab

We investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets. We introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of Smith et al. (1988). Treatment groups face a variable interest rate policy which depends on asset prices, while control groups are subjected to a constant interest rate. We observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles. However, we find that announcing the possibility of reserve requirements significantly reduces bubbles.     

Monetary policy,asset prices and consumption in China

This paper studies the wealth channel in China. Although the wealth channel has been found to be functioning in many advanced countries, its existence is yet to be explored in most emerging economies, also in China. In order to illuminate dynamics between monetary policy, asset prices and consumption, we use the structural vector autoregression method. The findings support the view that a loosening of China's monetary policy does indeed lead to higher asset prices. Furthermore, a positive shock to residential prices increases household consumption, while the role of stock prices seems to be small from the households’ point of view. Finally, we test the existence of the wealth channel more formally to find out whether those changes in asset prices that are caused by monetary policy are significant enough to increase consumption. In summary, the wealth channel remains weak but there are some signs of it via residential prices. The results are not that different from those attained for the advanced economies, where the size of the wealth channel has been found to be limited.     

Role of credit and monetary policy in determining asset prices: Evidence from emerging market economies

We examine the relative dominance of credit and monetary policy shocks in influencing asset prices in emerging markets. Estimates from panel VAR models for 22 EMEs provide evidence of a significant impact of bank credit on house prices in contrast to trivial impact on stock prices, possibly due to prudential regulations on banks’ exposure to stock markets. Contractionary monetary policy triggers sizeable and persistent decline in stock than housing prices as higher interest rates may render the funding of leverage costlier. Global shocks play an important role in explaining fluctuations in domestic stock prices rather than house prices since the latter class of asset is largely non-tradable across countries.     

Evolving United States stock market volatility: The role of conventional and unconventional monetary policies

Despite the econometric advances of the last 30 years, the effects of monetary policy stance during the boom and busts of the stock market are not clearly defined. In this paper, we use a structural heterogeneous vector autoregressive (SHVAR) model with identified structural breaks to analyse the impact of both conventional and unconventional monetary policies on U.S. stock market volatility. We find that contractionary monetary policy enhances stock market volatility, but the importance of monetary policy shocks in explaining volatility evolves across different regimes and is relative to supply shocks (and shocks to volatility itself). In comparison to business cycle fluctuations, monetary policy shocks explain a greater fraction of the variance of stock market volatility at shorter horizons, as in medium to longer horizons. Our basic findings of a positive impact of monetary policy on equity market volatility (being relatively stronger during calmer stock market periods) are also corroborated by analyses conducted at the daily frequency based on an augmented heterogeneous autoregressive model of realised volatility (HAR-RV) and a multivariate k-th order nonparametric causality-in-quantiles framework. Our results have important implications both for investors and policymakers.     

Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states

This study presents evidence on the effect of domestic and Euro Area monetary policy on stock prices in four new EU member states of Central Europe and the main determinants of stock price volatility, estimating structural vector autoregressive models identified with short-run restrictions. We find that stock prices in the considered new EU member states are more sensitive to changes in the Euro Area interest rate than to the domestic one. Moreover, the bulk of stock price volatility in these countries is due to shocks related to exchange rate and Euro Area monetary policy. Overall, we find that local stock markets are more sensitive to external shocks than to domestic ones.     

Fiscal policy and stock market efficiency: Evidence for the United States

This paper examines the extent to which fiscal policy actions affect the stock market's behavior for the US during 1968–2005. The findings are consistent with the hypothesis that past budget deficits negatively affect current stock returns thus suggesting that the market is inefficient with respect to information about future fiscal policy actions. One interpretation of this ‘disturbing’ result is that market participants do not place much faith on news about the budget deficits as they do not believe that deficits could adversely impact the stock market. Instead, what the market considers most important is news about monetary policy.     

Nonlinear effects of monetary policy on stock returns in a smooth transition autoregressive model

This paper employs smooth transition autoregressive (STAR) models to investigate the nonlinear effect of monetary policy on stock returns. The change in the Federal funds rate is used as an endogenous measure of monetary policy, and the growth rate of industrial production is also considered in the model. Our results show that the relationship between the monetary policy and excess returns on stock prices is positive and nonlinear. A decrease in the Federal funds rate causes a larger increase in excess returns if excess stock returns are located in the extreme low excess returns regime.     

The impact of monetary policy in the midst of big shocks

This paper studies the impact of Federal Reserve policies that created the largest deviations from price stability during the Fed׳s first 100 years: the post-World War I deflation, the deflation of the Great Depression, the inflation of World War II, and the Great Inflation of the 1970s. In terms of their macroeconomic impacts, I find that deflation was uniquely depressing in the 1930s because of cartel policies that prevented nominal prices and wages from adjusting to clear markets, and not because deflation is generically depressing. I find that the biggest impact of monetary policy during World War II was in debasing debt through inflation. I find that the main drivers of the 1970s economy were long-run changes in productivity and the labor market, and that there may have been little that the Fed could have done at this time to expand employment and output. More broadly, I find that macroeconomic performance would have been better over the Fed׳s first century had the Fed followed a monetary policy to deliver stable prices.     

Effect of monetary policy shocks on the racial unemployment rates in the US

This study analyzes the effect of monetary policy shocks on the unemployment rate of different racial groups in the US, using data from 1969Q2 to 2015Q4. Employing a narrative approach to identify monetary policy shocks and local projections, we find that although an expansionary monetary shock affects White workers positively and significantly, the effect on Black workers is larger, and for Hispanic workers it is not statistically different from zero. These results are robust when considering unconventional monetary policy measures in the specification, and when exploring the impact of monetary policy on different genders and age groups. We also highlight how recession affects the transmission channel of monetary policy to the labor market for White and Hispanic workers. Finally, further extensions suggest that the Fed’s monetary policy is effective in reducing the racial unemployment gap, particularly between Whites and Blacks, and during economic booms.     

Monetary Policy and the Stock Market: Theory and Empirical Evidence

This paper gives a comprehensive review of the literature on the interaction between real stock returns, inflation, and money growth, with a special emphasis on the role of monetary policy. This is an area of research that has interested monetary and financial economists for a long time. Monetary economists have been interested in the question whether money has any effect on real stock prices, while financial economists have investigated whether equity is a good hedge against inflation. Empirical studies show that money can be helpful in predicting future stock returns. Empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run. The short-run negative relation between stock returns and inflation can easily be explained by theoretical models. If the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns, while if it conducts a procyclical policy we could observe a positive relation. According to both theoretical and empirical studies investors receive an inflation risk premium for holding equity.     

New insights into the role of global factors in BRICS stock markets: A quantile cointegration approach

Because of the acceleration in marketization and globalization, stock markets in the BRICS (Brazil, Russia, India, China, and South Africa) countries are affected by various global factors, for example, oil prices, gold prices, global stock market volatility, global economic policy uncertainty, financial stress, and investor sentiment. This paper offers new insights into the short- and long-run linkages between global factors and BRICS stock markets by applying the quantile autoregressive distributed lags (QARDL) approach. This novel methodology enables us to test short- and long-run linkages accounting for distributional asymmetry. That is, the nonlinear dynamic relationship between the global factors and BRICS stock prices depends on market conditions. Our empirical results show that the effects of gold prices and global stock market volatility on BRICS stock prices are more significant in the long run than in the short run. A decrease in global stock market volatility is associated with higher stock prices, while gold prices demonstrate upward co-movement in dynamic correlations with stock markets. Irrational factors, such as economic policy uncertainty, financial stress, and investor sentiment, play a critical role in the short term, and negative interdependence is dominant. Finally, the rolling-window estimation technique is used to examine time-varying patterns between major global factors and BRICS stock markets.     

Policy on the margin: Evaluating the impact of margin debt requirements on stock valuations

Rapidly rising stock prices in the 1990s raised worries about potential inflationary or destabilizing effects. The use of initial margin debt requirements by the Federal Reserve was proposed to reduce the run-up in stock prices. This paper evaluates the likely impact of margin debt requirements on stock valuations. The results suggest that higher margin requirements would have had no impact on stock market valuations in the 1990s, Moreover, other forms of consumer credit are relatively more important in determining household equity positions than margin debt, making the control of margin debt not an obvious public policy choice.(JEL E58, G18)     

财政货币政策、房价波动与宏观杠杆——基于信心传导机制的分析

利用市场主体信心的微观调查数据,借助仿真情景模拟下的反事实实验方法对信心能否在财政政策和货币政策调控杠杆与房价的过程中发挥作用进行实证分析,而后利用TVP-VAR模型对其内在机制展开深入探讨。研究表明,当信心被虚拟冲击抵消后,政策效果与基准结果呈现明显分化。即信心能够显著影响财政货币政策对杠杆与房价的作用效果,且经进一步实证分析得知信心正向影响于房价、负向影响于宏观杠杆。因此,政府在实施政策调控时,应注意市场预期的引导,在借助信心渠道强化房价调控政策效果的同时,也要关注信心对杠杆调控政策效果的干扰,并注意政策制定的连贯性与稳定性,以及财政货币政策的协调搭配。     

股市“财富效应”对我国货币政策的影响

伴随着中国证券市场的长足发展 ,股市的“财富效应”也日益显著。本文从分析股市“财富效应”及“财富负效应”影响货币政策的机制入手 ,进而探讨了其对我国现行货币政策的冲击 ,并相应提出了几点政策建议。     

Fiscal policy and asset markets: A semiparametric analysis

Using a flexible semiparametric varying coefficient model specification, this paper examines the role of fiscal policy on the US asset markets (stocks, corporate and treasury bonds). We consider two possible roles of fiscal deficits (or surpluses): as a separate direct information variable and as a (indirect) conditioning information variable indicating binding constraints on monetary policy actions. The results show that the impact of monetary policy on the stock market varies, depending on fiscal expansion or contraction. The impact of fiscal policy on corporate and treasury bond yields follow similar patterns as in the equity market. The results are consistent with the notion of strong interdependence between monetary and fiscal policies.     

The effects of foreign exchange and monetary policies in Russia

This paper examines the effects of Russian foreign exchange and monetary policies under conditions of abundant natural resources during the period 1999–2011 using structural VAR models. The results suggest that monetary policy shocks, which are identified as money supply disturbances, have a persistent effect on real output, and more than half of the volatility in real output can be explained by changes in the money supply. Furthermore, the analysis reveals that stock prices are a more significant transmission channel of monetary policy than bank loans.     

A quantile-copula approach to dependence between financial assets

This article unveils the dependence structure between United States stock prices, crude oil prices, exchange rates, and U.S. interest rates. In particular, we employ linear and nonlinear estimation methods, such as quantile regression and the quantile-copula approach. Over the 1998–2017 period, we find that there is a positive relationship between the dollar value and the S&P 500 stock price, with the exception of the lower and upper tails of the stock return distribution. Further evidence is obtained on the dependence structure between other asset returns. The stock returns are negatively related to oil prices but positively to U.S. interest rates. Our results highlight the way that financial assets are linked, which have implications for risk management and monetary policy.     

Do credit market imperfections justify a central bank׳s response to asset price fluctuations?

Do credit market imperfections justify a central bank׳s response to asset price fluctuations? This study addresses this question from the perspective of equilibrium determinacy. In the model we use, prices are sticky and the working capital of firms is subject to asset values because of a lack of commitment. If credit market imperfections exist to a small degree, the Taylor principle is a necessary and sufficient condition for equilibrium determinacy, and monetary policy response to asset price fluctuations is good from the perspective of equilibrium determinacy. However, if credit market imperfections exist to a large degree such that the collateral constraint is binding, then the Taylor principle no longer guarantees equilibrium determinacy, and monetary policy response to asset price fluctuations becomes a source of equilibrium indeterminacy. We find that the existence of credit market imperfections makes it unsuitable to initiate a monetary policy response to deal with asset price fluctuations. We also find that reductions in credit market imperfections can enlarge the indeterminacy region of the model parameters.     

Impact of uncertainty on high frequency response of the U.S. stock markets to the Fed's policy surprises

This paper examines the impact of uncertainty on estimated response of stock returns to U.S. monetary policy surprise. This is motivated by the Lucas island model which suggests an inverse relationship between the effectiveness of a policy and the level of uncertainty in the economy. Using high frequency daily data from the Federal funds futures market, we first estimate the response of S&P 500 stock returns to monetary policy surprises within the time varying parameter (TVP) model. We then analyze the relationship of these time varying estimates with the benchmark VIX index and alternative measures of uncertainty. Evidence suggests a significant negative relationship between the level of uncertainty and the time varying response of S&P 500 stock returns to unanticipated changes in the interest rate. Thus, at higher levels of uncertainty the impact of monetary policy shocks on stock markets is lower. The results are robust to different measures of uncertainty.     

Asset market response to monetary policy news from SNB press releases

This paper analyses the effects of Swiss National Bank (SNB) communication on asset prices. It distinguishes between different monetary policy news contained in press releases following a monetary policy decision. Employing a latent variable approach and event-study methods, I find that medium- and long-term bond yields respond to changes in the communicated inflation and GDP forecasts as well as to the degree of pessimism expressed in press releases. Exchange rates mainly react to changes in the GDP forecast while stocks do not react to SNB communication on monetary policy announcement days. Additionally, short-term expectations about the future path of the policy rate are driven by the communicated inflation forecast. The results underline the role of qualitative news beyond quantitative forecasts in influencing market expectations and asset prices.