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The effects of conventional and unconventional monetary policy shocks on the stock market

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  • Sajjadur Rahman

    (Texas A&M University - San Antonio)

Abstract

This paper applies weekly data to investigate the effects of the conventional and unconventional monetary policy shocks on US stock returns, using a multivariate structural VAR model that considers transmission mechanisms in channeling the effects of these shocks into the stock market. We identify both types of policy shocks using high and low volatility in the relevant policy variables. Our empirical results suggest that the interest rate channel, not the bank lending channel, plays a major role in the process of transmission and the US stock market responds less to the conventional monetary policy than the unconventional one. We estimate that expansionary policy shocks that lower the long term interest rate by 25 basis points increase stock returns by 0.57% and 2% under the conventional and unconventional monetary policies, respectively, over five weeks.

Suggested Citation

  • Sajjadur Rahman, 2025. "The effects of conventional and unconventional monetary policy shocks on the stock market," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 49(2), pages 364-382, June.
    • Handle: RePEc:spr:jecfin:v:49:y:2025:i:2:d:10.1007_s12197-025-09705-1
    DOI: 10.1007/s12197-025-09705-1
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    References listed on IDEAS

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    1. Refet Gürkaynak & Hati̇ce Gökçe Karasoy‐Can & Sang Seok Lee, 2022. "Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect," Journal of Finance, American Finance Association, vol. 77(4), pages 2375-2421, August.
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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