Monetary shocks and asymmetric effects in an emerging stock market: The case of China

In this paper, we study the effect of monetary shocks on the Chinese stock market over the period of 2005 to 2011 with the MSVAR–EGARCH model. The evidence suggests that Chinese monetary policies have significantly asymmetric effects on the stock market in different time periods and market cycles. The effects of shocks from interest rate and reserve rate vary across market cycles but effects from money supply and exchange rate do not. Empirical evidence from the non-linear model shows that monetary policy changes increase stock market volatility, even though these monetary policies are often aimed at stabilizing macro-economic activities. The evidence suggests that both the market conditions and the effects on stock markets should be taken into consideration in monetary policy design and implementation.     

Predicting long-run risk factors of stock returns: Evidence from Australia

This study utilises the stock market data provided by the Australian Equity Database to analyse the long-run relationship between Australian stock returns and key macroeconomic variables over the period 1926–2017. To measure the diverse risk factors in the stock market, we examine the possible determinants in four main categories: real, financial, domestic and international. Our results reveal that historical stock returns are strongly connected to financial and international factors as compared to real and domestic factors. Both the 1973–1974 OPEC Oil Price Crisis and 2007–2008 Global Financial Crisis had dampening effects on stock returns. There is a positive association between the US and Australian stock markets in the long-run. These findings on stock market dynamics and their linkages with domestic and international macroeconomic policy changes in the long-run have important implications for traders and practitioners.     

Co-integration and causality analysis between stock market prices and their determinates in Jordan

The current study examines the short- and long-term equilibrium relationship between the stock price index (SPI) and the macroeconomic variables in Jordan. Annual time series data over the 1978–2010 period for industrial production (IP), money supply (M2), exchange rate (EX), and discount rate (DR) were used. The ADF, bound testing approach, CUSUM, and CUSUMQ tests were applied to test the stationary and co-integration among variables. The results suggest the existence of a long-term equilibrium relationship between SPI and the macroeconomic variables (i.e., IP, M2, EX, and DR).     

The impact of Chinese monetary policy on co-movements between money and capital markets

From 2010 to 2017, with interest rate liberalization and capital market development in China, the impact of monetary policies on China’s financial markets underwent continuous evolution. Using the DCC-GARCH model, this study investigates the transmission process of monetary policies from the money market to capital markets (stock and bond markets). The results show that in the early stage the instability of the money and stock markets and the downturn in the bond market are primarily caused by the block of monetary policy transmission and the paucity of fund sources in the capital markets. Subsequently, the outbreak of the 2013 money shortage and the 2015 stock market crash are also closely related to monetary policies. In the later periods, the money and stock markets maintain a low degree of correlation for a long time, reducing the impact of destabilizing factors on the stock market. By contrast, with the advancement of interest rate reform and the optimization of bond market structure, the bond market is highly relevant to the money market. The central bank regulates the bond market more effectively using both traditional and innovative monetary policy tools.     

Monetary policy surprises and firm-level stock return predictability: evidence from a new panel-based approach

We employ a new panel-based testing procedure that is robust to the uncertain persistence of regressors, time-varying volatility and cross-sectional error dependence in studying the predictive dynamics between conventional US monetary policy surprises and firm-level stock returns. We find that accounting for cross-sectional dependence by means of (estimated) factors considerably alters the predictive significance of monetary policy surprises depending on the sample period being studied. Concretely, during the period 1990–2000, monetary policy has no influence on future stock returns when cross-sectional dependence is accounted for by means of common factor augmentation. By contrast, the predictive power of monetary policy is even boosted when introducing common factors into the model when the period of analysis covers 2002–2007.     

Macroeconomic News and Stock Returns in the United States and Germany

Abstract. Using daily data for the January 1997 to June 2002 period, we analyze similarities and differences in the impact of macroeconomic news on stock returns in the United States and Germany. We consider 27 different types of news for the United States and 12 different types of news for Germany. For the United States, we present evidence for asymmetric reactions of stock prices to news. In a boom (recession) period, bad (good) news on GDP growth and unemployment or lower (higher) than expected interest rates may be good news for stock prices. In the period under consideration there is little evidence for asymmetric effects in Germany. However, in the case of Germany, international news appears at least as important as domestic news. There is no evidence that US stock prices are influenced by German news. The analysis of bi-hourly data for Germany confirms these results.     

Does the currency board matter? US news and Argentine financial market reaction

Using a Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model, we study the effects of the US monetary policy and macroeconomic announcements on Argentine money, stock and foreign exchange markets over the period January 1998 to July 2007. We show, first, that both types of news have a significant impact on all markets. Second, there are noticeable differences in reaction for different subsamples: Argentine money markets were more dependent on US news under the currency board than after it was abandoned as the floating exchange rate partly absorbs spillover effects from the US. Finally, we find that the US-dollar-denominated assets react less to US news than peso-denominated assets, which suggests that the currency board was not completely credible during its final years.     

Alternative passive monetary policies in an inflationary economy

This paper considers three alternative specifications of passive monetary policies in a simple dynamic macroeconomic model of an inflationary economy in which both the dynamics of wealth accumulation and the evolution of inflationary expectations play central roles. These policies include one in which the real stock of money is held fixed; one in which the rate of nominal monetary growth is held constant; and a third in which the real stock of government bonds is held fixed. We compare the dynamic behavior of the system as well as its steady state properties under these alternative policies. Two expectations hypotheses—the adaptive and perfect myopic foresight—are considered and their implications related at some length.     

Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate

This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative government spending, and real oil price to explain real exchange rate persistence. By using quarterly data over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the proposed hybrid model provides a coherent long-run relation to explain the dollar–yen exchange rate as opposed to the conventional monetary model.     

Stock market response to monetary and fiscal policy shocks: Multi-country evidence

A Structural VAR model is employed to investigate the effects of monetary and fiscal policy shocks on stock market performance in Germany, UK and the US. A significant number of past studies have concentrated their attention on the relationship between monetary policy and stock market performance, yet only few on the effects of fiscal policy on stock markets. Even more we know little, if any, on the effects of fiscal and monetary policies on stock market performance when the two policies interact. This study aims to fill this void. Our results show that both fiscal and monetary policies influence the stock market, via either direct or indirect channels. More importantly, we find evidence that the interaction between the two policies is very important in explaining stock market developments. Thus, investors and analysts in their effort to understand the relationship between macroeconomic policies and stock market performance should consider fiscal and monetary policies in tandem rather than in isolation.     

Deficit financing,liquidity, and the government budget constraint

This article presents a macroeconomic model in which government deficits are bond financed and the stock of bonds may affect both expected income and liquidity. If either of these effects exists, then comparative statics analysis requires the government budget to be balanced. Temporary divergences from a balanced budget and changes in the maturity structure of the government debt may be analyzed in terms of changes in the stock of bonds. It is shown that traditional fiscal and monetary policies may have a perverse effect; that to ensure effective policy, deficit financing and open market operations should be avoided; and that only policies involving a balanced budget or the financing of deficits or surpluses through changes in the stock of money should be undertaken.     

Measuring the effectiveness of US monetary policy during the COVID-19 recession

The COVID-19 recession that started in March 2020 led to an unprecedented decline in economic activity across the globe. To fight this recession, policy makers in central banks engaged in expansionary monetary policy. This paper asks whether the measures adopted by the US Federal Reserve (Fed) have been effective in boosting real activity and calming financial markets. To measure these effects at high frequencies, we propose a novel mixed frequency vector autoregressive (MF-VAR) model. This model allows us to combine weekly and monthly information within a unified framework. Our model combines a set of macroeconomic aggregates such as industrial production, unemployment rates, and inflation with high-frequency information from financial markets such as stock prices, interest rate spreads, and weekly information on the Fed's balance sheet size. The latter set of high-frequency time series is used to dynamically interpolate the monthly time series to obtain weekly macroeconomic measures. We use this setup to simulate counterfactuals in absence of monetary stimulus. The results show that the monetary expansion caused higher output growth and stock market returns, more favorable long-term financing conditions and a depreciation of the US dollar compared with a no-policy benchmark scenario.     

The dependence structure between the Canadian stock market and the USD/CAD exchange rate: a copula approach

Abstract This paper investigates the dependence structure between the real Canadian stock returns and the real USD/CAD exchange rate returns, using the Symmetrized Joe‐Clayton (SJC) copula function. We estimate the SJC copula with monthly data over the period 1995:1 to 2006:12. Our results show significant asymmetric static and dynamic tail dependence between the real stock returns and the real exchange rate returns, such that the two returns are more dependent in the left than in the right tail of their joint distribution. We explain this asymmetric dependence in terms of an asymmetric interest rate policy by Canadian monetary authorities in response to changes in the real exchange rate during sub‐periods of falling and rising commodity prices.     

Are there asymmetries in the response of bank interest rates to monetary shocks?

This article examines the velocity and asymmetry of the response of bank interest rates to monetary policy shocks. Using an asymmetric vector error correction model, it analyses the pass-through of changes in money market rates to retail bank interest rates in Italy in the period 1985–2002. The main results of the article are: (1) the speed of adjustment of bank interest rates to monetary policy changes increased significantly after the introduction of the 1993 Consolidated Law on Banking; (2) interest rate adjustment in response to positive and negative shocks is asymmetric in the short run, but not in the long run; (3) banks adjust their loan (deposit) rate faster during periods of monetary tightening (easing); (4) this asymmetry almost vanished since the 1990s.     

我国货币政策对股票价格的影响——基于Markov区制转换VAR模型的实证分析

本文利用1996年1月～2010年4月的数据,运用MSIH(2)-VAR(4)模型和脉冲响应分析不同区制下货币政策对股票价格的影响。发现利用非线性模型是合理的,并在不同区制下货币政策工具对股票价格的影响效果在时间、方向和程度上表现不同,同时,对于上证A股和深证A股影响也是不同的。对于货币供应量,在股市低迷期,它的变化会立即正向影响到股票价格,但在股市膨胀期,则滞后1个月后才会正向影响股票价格;对于银行信贷,在股市低迷期,它的提高并不能提高股价,而在股市膨胀期,它的提高才会使股价上扬;对于利率,在两个区制下,它的提高都会使股价下跌,并且在滞后1个月才会表现出来。但是,相比较而言,利率对股票市场的影响在股市膨胀期效果更明显。并且总体上货币政策对股市的影响较大,尤其是在股票低迷期。     

论股票市场对扩张性货币政策效力的影响及相应对策

面对我国20世纪90年代中期以来的通货紧缩状况，货币当局实施了一系列扩张性货币政策。由于我国股票市场在发展过程中的一些问题、银行体制上的缺陷以及宏观经济环境的影响等因素，股票市场并不能在货币政策和实体经济之间有效地发挥传导作用；货币政策本身也受到了股票市场发展的重要影响。为解决问题，应当在股票市场、企业投资环境和货币政策本身三个方面进行完善。     

Can money endogeneity be generalized? Empirical evidence from Caribbean economies

This study investigates the direction of causality between the money supply and reserve money for some selected Caribbean countries using recently developed techniques of causality tests. The findings suggest that neither money endogeneity nor money exogeneity can be generalized to all small, open economies. The causal patterns may differ according to whether the monetary arrangements of the countries follow either a fixed or flexible exchange rate regime. Moreover, this-study highlights the fact that a mixed bag of policies must be implemented by respective central banks to maintain macroeconomic stability.     

Can growth-enhanced monetary policy improve welfare when people seek social status?

This paper examines the growth and welfare effects from an increase in the rate of money supply in an Ak type growth model with a relative wealth-enhanced social status motive, production externalities, and liquidity constraints. When only consumption is constrained by liquidity, fast money supply can hasten output growth unless seigniorage revenue is wasted and production externalities do not exist. We find that even though money growth normally promotes economic growth, it does not improve welfare when capital stock is over-accumulated. In general, an optimal monetary policy minimizes seigniorage. Our results also conclude that the optimal monetary policy rarely follows the Friedman rule.     

A vector error correction model of the Singapore stock market

This article examines the long-term equilibrium relationships between the Singapore stock index and selected macroeconomic variables, as well as among stock indices of Singapore, Japan, and the United States. Upon testing appropriate vector error-correction models, we detected that changes in two measures of real economic activities, industrial production and trade, are not integrated of the same order as changes in Singapore's stock market levels. However, changes in Singapore's stock market levels do form a cointegrating relationship with changes in price levels, money supply, short- and long-term interest rates, and exchange rates. While changes in interest and exchange rates contribute significantly to the cointegrating relationship, those in price levels and money supply do not. This suggests that the Singapore stock market is interest and exchanges rate sensitive. Additionally, the article concludes that the Singapore stock market is significantly and positively cointegrated with stock markets of Japan and the United States.     

Monetary environments and stock returns revisited: A quantile regression approach

We investigate the impact of monetary conditions on stock market returns at different points on the return distributions. Our results reveal no association between stock returns and monetary environments at the lower quantiles. At the upper quantiles, however, we find that expansive monetary conditions lead to significantly larger stock returns. The relationship between returns and monetary conditions at the upper quantiles is also found to be asymmetric, exhibiting a monotonic increase in responsiveness at successive quantiles.