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Stock Prices and Monetary Policy: An Impulse Response Analysis

Author

Listed:
  • Guglielmo Maria Caporale

    (Centre for Empirical Finance, Brunel University, West London, UK)

  • Alaa M. Soliman

    (Faculty of Business and Law, Leeds Metropolitan University Leeds, UK)

Abstract

This paper analyses the relationship between monetary policy and the stock market with the aim of gaining new insights into the transmission mechanism of monetary policy. The empirical findings shed light on the importance of stock prices for money demand and therefore provide useful information to monetary authorities to decide on policy actions. A technique developed by Wickens and Motto (2001) for identifying shocks by estimating a VECM for the endogenous variables is employed. The reported evidence suggests that stock markets play a significant role in the money demand function.

Suggested Citation

  • Guglielmo Maria Caporale & Alaa M. Soliman, 2013. "Stock Prices and Monetary Policy: An Impulse Response Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 701-709.
    • Handle: RePEc:eco:journ1:2013-03-13
    as

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    References listed on IDEAS

    as
    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
    3. Massimo Caruso, 2001. "Stock prices and money velocity: a multi-country analysis," Empirical Economics, Springer, vol. 26(4), pages 651-672.
    4. Carstensen, Kai, 2006. "Stock Market Downswing and the Stability of European Monetary Union Money Demand," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 395-402, October.
    5. Claudio E. V. Borio & Wilhelm Fritz, 1995. "The response of short-term bank lending rates to policy rates: a cross-country perspective," BIS Working Papers 27, Bank for International Settlements.
    6. 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.
    7. 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.
    8. Massimo Caruso, 2006. "Stock Market Fluctuations and Money Demand in Italy, 1913–2003," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 35(1), pages 1-47, February.
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    Cited by:

    1. Muhammad Ali Nasir & Junjie Wu & Milton Yago & Alaa M. Soliman, 2016. "Macroeconomic policy interaction: State dependency and implications for financial stability in UK: A systemic review," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1154283-115, December.

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    More about this item

    Keywords

    Asset Prices; Stock Market; Monetary Policy; Impulse Response Analysis; VECM; VAR;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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