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The Effect of Equity Market Integration on the Transmission Monetary Policy. Evidence from Australia

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Author Info
Cinzia Alcidi () (IUHEID, The Graduate Institute of International and Development Studies, Geneva)

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Abstract

This paper investigates the effects of equity market integration on the transmission of monetary policy shocks. Based on the assumption that financial market liberalization and integration lead to falling portfolio holding costs, we analyze its effect on a two-country DSGE model with staggered prices and endogenous portfolio choice under incomplete markets. The model predicts that the reaction of stock prices, output and RER becomes muted upon impact and less persistence with falling portfolio holding costs. To test for a similar pattern in the data, we estimate a VAR with rolling coefficients for Australia, which provides a good case study. We identify a monetary policy shock with the sign restriction approach. The impulse responses generated by the data are consistent with the prediction of the model and imply that equity market liberalization seems to weaken the impact of monetary policy, at least on stock prices.

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Publisher Info
Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number heidwp03-2009.

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Length: 65
Date of creation: Mar 2009
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Handle: RePEc:gii:giihei:heidwp03-2009

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Related research
Keywords: Endogenous portfolio; Monetary policy; Financial liberalization; FAVAR;

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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This page was last updated on 2009-11-20.

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