IDEAS home Printed from https://ideas.repec.org/p/bdi/wptemi/td_513_04.html
   My bibliography  Save this paper

Monetary policy and stock prices: theory and evidence

Author

Listed:
  • Stefano Neri

    (Banca d'Italia)

Abstract

The objective of this paper is to evaluate the effects of monetary policy shocks on stock market indices in the G-7 countries and Spain using the methodology of structural VARs. A model is estimated for each country and the effects of monetary policy shocks are evaluated by means of impulse responses. A contractionary shock has a negative and temporary effect on stock market indices. There is evidence of a significant cross-country heterogeneity in the persistence, magnitude and timing of the responses. A limited participation model with households trading in stocks is set up and the responses of stock prices to a monetary policy shock under different rules are evaluated. The model is able to account for the empirical response of stock prices to monetary policy shocks under different policy rules.

Suggested Citation

  • Stefano Neri, 2004. "Monetary policy and stock prices: theory and evidence," Temi di discussione (Economic working papers) 513, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_513_04
    as

    Download full text from publisher

    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2004/2004-0513/tema_513.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Thorbecke, Willem, 1997. "On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-654, June.
    2. Fank Smets, 1997. "Measuring Monetary Policy Shocks in France, Germany and Italy: The Role of The Exchange Rate," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(III), pages 597-616, September.
    3. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction of Monetary Policy to the Stock Market," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 639-669.
    4. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
    5. Christiano, Lawrence J, 2002. "Solving Dynamic Equilibrium Models by a Method of Undetermined Coefficients," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 21-55, October.
    6. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 243-270, January.
    7. Rapach, David E., 2001. "Macro shocks and real stock prices," Journal of Economics and Business, Elsevier, vol. 53(1), pages 5-26.
    8. Martin Lettau & Sydney Ludvigson & Charles Steindel, 2002. "Monetary policy transmission through the consumption-wealth channel," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 117-133.
    9. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    10. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    11. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    12. L.J. Christiano & C.J. Gust, 1999. "Taylor Rules in a Limited Participation Model," DNB Staff Reports (discontinued) 33, Netherlands Central Bank.
    13. Fabio Canova & Joaquim Pires Pina, 1998. "Monetary policy misspecification in VAR models," Economics Working Papers 420, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
    14. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June.
    15. Leonardo Gambacorta & Paolo Emilio Mistrulli, 2003. "Bank Capital and Lending Behaviour: Empirical Evidence for Italy," Temi di discussione (Economic working papers) 486, Bank of Italy, Economic Research and International Relations Area.
    16. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
    17. Canova, Fabio, 2002. "Validating Monetary DSGE Models through VARs," CEPR Discussion Papers 3442, C.E.P.R. Discussion Papers.
    18. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
    19. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-1247, December.
    20. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
    21. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-353, May.
    22. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    23. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, vol. 84(Q IV), pages 17-51.
    24. Laurence Boone & Claude Giorno & Pete Richardson, 1998. "Stock Market Fluctuations and Consumption Behaviour: Some Recent Evidence," OECD Economics Department Working Papers 208, OECD Publishing.
    25. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
    26. Mr. Ralph Chami & Mr. Thomas F. Cosimano & Connel Fullenkamp, 1999. "The Stock Market Channel of Monetary Policy," IMF Working Papers 1999/022, International Monetary Fund.
    27. Peter Sellin, 2001. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
    28. Kim, Soyoung, 1999. "Do monetary policy shocks matter in the G-7 countries? Using common identifying assumptions about monetary policy across countries," Journal of International Economics, Elsevier, vol. 48(2), pages 387-412, August.
    29. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-944, October.
    30. Thomas F. Cooley & Vincenzo Quadrini, 1999. "Optimal Time-Consistent Monetary Policy in a Phillips Curve World," Working Papers 99-15, New York University, Leonard N. Stern School of Business, Department of Economics.
    31. Lastrapes, W. D., 1998. "International evidence on equity prices, interest rates and money," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 377-406, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bjørnland, Hilde C. & Leitemo, Kai, 2009. "Identifying the interdependence between US monetary policy and the stock market," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 275-282, March.
    2. Solikin M. Juhro & Bernard N. Iyke & Paresh K. Narayan, 2020. "Interdependence Between Monetary Policy And Asset Prices In Asean-5 Countries," Working Papers WP/01/2020, Bank Indonesia.
    3. Castelnuovo, Efrem & Nisticò, Salvatore, 2010. "Stock market conditions and monetary policy in a DSGE model for the U.S," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1700-1731, September.
    4. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Ensuring financial stability: Financial structure and the impact of monetary policy on asset prices," IMFS Working Paper Series 16, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    5. Pirovano, Mara, 2012. "Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states," Economic Systems, Elsevier, vol. 36(3), pages 372-390.
    6. Don Bredin & Stuart Hyde & Dirk Nitzsche & Gerard O'Reilly, 2009. "European monetary policy surprises: the aggregate and sectoral stock market response," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 156-171.
    7. Gerlach, Stefan & Assenmacher-Wesche, Katrin, 2008. "Financial structure and the impact of monetary policy on asset prices," CFS Working Paper Series 2008/30, Center for Financial Studies (CFS).
    8. Guarda, Paolo & Jeanfils, Philippe, 2012. "Macro-Financial Linkages: evidence from country-specific VARs," CEPR Discussion Papers 8875, C.E.P.R. Discussion Papers.
    9. R. Bonci & F. Columba, 2008. "Monetary policy effects: new evidence from the Italian flow-of-funds," Applied Economics, Taylor & Francis Journals, vol. 40(21), pages 2803-2818.
    10. Čeh Časni Anita & Dumičić Ksenija & Tica Josip, 2016. "The Panel VAR Approach to Modelling the Housing Wealth Effect: Evidence from selected European post-transition economies," Naše gospodarstvo/Our economy, Sciendo, vol. 62(4), pages 23-32, December.
    11. Kapp, Daniel & Kristiansen, Kristian, 2021. "Euro area equity risk premia and monetary policy: a longer-term perspective," Working Paper Series 2535, European Central Bank.
    12. Challe, Edouard & Giannitsarou, Chryssi, 2014. "Stock prices and monetary policy shocks: A general equilibrium approach," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 46-66.
    13. Hossain, Md. Sajib & Hossain, Md. Amzad & Amin, Shabnaz, 2016. "An Empirical Analysis of the Relationship between Monetary Policy Stance and Stock Price in Bangladesh," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 39(1-2), pages 27-57, March-Jun.
    14. Massimo Caruso, 2006. "Stock market fluctuations and money demand in Italy, 1913-2003," Temi di discussione (Economic working papers) 576, Bank of Italy, Economic Research and International Relations Area.
    15. Riccardo Bonci & Francesco Columba, 2007. "The Effects Of Monetary Policy Shocks On Flow Of Funds:The Italian Case," Money Macro and Finance (MMF) Research Group Conference 2006 75, Money Macro and Finance Research Group.
    16. Castelnuovo, Efrem, 2013. "Monetary policy shocks and financial conditions: A Monte Carlo experiment," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 282-303.
    17. repec:zbw:cfswop:wp200830 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bjørnland, Hilde C. & Leitemo, Kai, 2009. "Identifying the interdependence between US monetary policy and the stock market," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 275-282, March.
    2. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    3. Challe, Edouard & Giannitsarou, Chryssi, 2014. "Stock prices and monetary policy shocks: A general equilibrium approach," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 46-66.
    4. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting \\"M\\" back in monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 1217-1264.
    5. Canova, Fabio & Nicolo, Gianni De, 2002. "Monetary disturbances matter for business fluctuations in the G-7," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1131-1159, September.
    6. Andrea Nobili & Stefano Neri, 2006. "The transmission of monetary policy shocks from the US to the euro area," Temi di discussione (Economic working papers) 606, Bank of Italy, Economic Research and International Relations Area.
    7. Bouakez, Hafedh & Essid, Badye & Normandin, Michel, 2013. "Stock returns and monetary policy: Are there any ties?," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 33-50.
    8. Dedola, Luca & Lippi, Francesco, 2005. "The monetary transmission mechanism: Evidence from the industries of five OECD countries," European Economic Review, Elsevier, vol. 49(6), pages 1543-1569, August.
    9. Shioji, Etsuro, 2000. "Identifying Monetary Policy Shocks in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 14(1), pages 22-42, March.
    10. Mojon, Benoît, 2008. "When did unsystematic monetary policy have an effect on inflation?," European Economic Review, Elsevier, vol. 52(3), pages 487-497, April.
    11. Philip Arestis & Georgios Chortareas & John D. Tsoukalas, 2010. "Money and Information in a New Neoclassical Synthesis Framework," Economic Journal, Royal Economic Society, vol. 120(542), pages 101-128, February.
    12. R. Bonci & F. Columba, 2008. "Monetary policy effects: new evidence from the Italian flow-of-funds," Applied Economics, Taylor & Francis Journals, vol. 40(21), pages 2803-2818.
    13. Li, Yun Daisy & Iscan, Talan B. & Xu, Kuan, 2010. "The impact of monetary policy shocks on stock prices: Evidence from Canada and the United States," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 876-896, September.
    14. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    15. Laopodis, Nikiforos T., 2013. "Monetary policy and stock market dynamics across monetary regimes," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 381-406.
    16. Karamé, Frédéric & Patureau, Lise & Sopraseuth, Thepthida, 2008. "Limited participation and exchange rate dynamics: Does theory meet the data?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1041-1087, April.
    17. Marek Rusnak & Tomas Havranek & Roman Horvath, 2013. "How to Solve the Price Puzzle? A Meta-Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 37-70, February.
    18. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
    19. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
    20. Fratzscher, Marcel & Juvenal, Luciana & Sarno, Lucio, 2010. "Asset prices, exchange rates and the current account," European Economic Review, Elsevier, vol. 54(5), pages 643-658, July.

    More about this item

    Keywords

    monetary policy; stock prices; structural VAR; limited participation model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_513_04. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/bdigvit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/bdigvit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.