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The Impact of Monetary Policy on Stock Prices
Christos Ioannidis a and Alexandros Kontonikas b*
a School of Management, University of Bath, Bath, UK
b Department of Economics, University of Glasgow, Glasgow, UK
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. Ourcontribution with respect to previous work is threefold. First, we show that our findings are 英国论文润色 robusttovarious alternative measures of stock returns. Second, our inferences are adjusted for the non-normalityexhibited by the stock returns data. Finally, we take into account the increasing co-movement amonginternational stock markets. The sensitivity analysis indicates that the results remain largely unchanged.
Keywords: Monetary policy; Asset prices
1. Introduction
Monetary policy attempts to achieve a set of objectives that are expressed in terms ofmacroeconomic variables such as inflation, real output and employment. However, monetarypolicy actions such as changes in the central bank discount rate have at best an indirect effecton these variables and considerable lags are involved in the policy transmission mechanism.Broader financial markets though, for example the stock market, government and corporatebond markets, mortgage markets, foreign exchange markets, are quick to incorporate newinformation. Therefore, a more direct and immediate effect of changes in the monetary policyinstruments may be identified using financial data. Identifying the link between monetarypolicy and financial asset prices is highly important to gain a better insight in the transmissionmechanism of monetary policy, since changes in asset prices play a key role in severalchannels.In this paper, we provide empirical evidence on the relationship between monetary
policy and one of the most important financial markets, the stock market. Stock prices areamong the most closely monitored asset prices in the economy and are commonly regarded as
being highly sensitive to economic conditions. In the context of the transmission mechanismthrough the stock market, monetary policy actions affect stock prices, which themselves are
linked to the real economy through their influence on consumption spending (wealth effectchannel) and investment spending (balance sheet channel)1. As Bernanke and Kuttner (2005)
point out, some observers view the stock market as an independent source of macroeconomicvolatility to which policymakers may wish to respond. Stock prices often exhibit pronouncedvolatility and boom-bust cycles leading to concerns about sustained deviations from their‘fundamental’ values that, once corrected, may have significant adverse consequences for thebroader economy. Hence, establishing quantitatively the existence of a stock market responseto monetary policy changes will not only be germane to the study of stock marketdeterminants but will also contribute to a deeper understanding of the conduct of monetarypolicy and of the potential economic impact of policy actions or inactions.

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