Effects of Monetary Policy Frameworks on Stock Market Volatilities: An Empirical Study of Global Economies

This study investigates the relationship between monetary policy frameworks and stock market volatilities across countries. Using a novel classification framework by Cobham (2021), we study 84 countries across the world over the period of 1984 to 2017. We find that countries that maintain a fixed exchange rate peg tend to experience higher levels of stock market volatility, while countries adopting flexible inflation-targeting policies tend to exhibit lower levels of stock market volatilities. Additionally, the stock markets of countries operating under monetary policies characterized by unstructured discretion tend to be more volatile, while those operating with well-structured discretion tend to be more stable. Our results also suggest that while the choice of monetary policy framework is an important determinant of stock market volatility, it is not the only factor driving it. As such, policymakers should carefully consider the implications of different monetary policy frameworks when designing monetary policy, and take a holistic approach to financial stability that incorporates a range of factors beyond just monetary policy frameworks.