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Monetary Policy Tightening and Financial Market Reactions: A Comparative Analysis of Soft and Hard Landings

Author

Listed:
  • Gimede Gigante

    (Department of Finance, Bocconi University, 20136 Milano, Italy)

  • Fernando Piccolantonio

    (Department of Finance, Bocconi University, 20136 Milano, Italy)

  • Francesca Scarlini

    (Department of Finance, Bocconi University, 20136 Milano, Italy)

Abstract

This paper investigates the macro-financial consequences of recent monetary policy tightening cycles, focusing on the distinction between soft and hard landings. Using an OLS regression framework applied to U.S. and Euro Area data from 1994 to 2023, we analyze the response of equity and bond markets, inflation, and GDP growth to central bank interest rate hikes. The findings suggest that, in most past tightening episodes, central banks succeeded in engineering soft landings without severe disruptions to market conditions or economic growth. However, the current post-pandemic context may lead to a two-stage adjustment, as inflation persistence and geopolitical shocks alter standard transmission dynamics. The study contributes to the ongoing policy debate on the timing and intensity of rate hikes, offering historical insights and empirical evidence from capital market signals.

Suggested Citation

  • Gimede Gigante & Fernando Piccolantonio & Francesca Scarlini, 2025. "Monetary Policy Tightening and Financial Market Reactions: A Comparative Analysis of Soft and Hard Landings," IJFS, MDPI, vol. 13(3), pages 1-24, August.
    • Handle: RePEc:gam:jijfss:v:13:y:2025:i:3:p:150-:d:1729993
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    References listed on IDEAS

    as
    1. Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2005. "The Optimal Degree of Discretion in Monetary Policy," Econometrica, Econometric Society, vol. 73(5), pages 1431-1475, September.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    3. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November.
    4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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