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Uncertainties under monetary tightening and easing shocks and different market states

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  • Blampied, Nicolás
  • Mahadeo, Scott Mark Romeo

Abstract

We examine the impact of monetary policy shocks on monetary policy and stock market uncertainties, testing for asymmetric responses to tightening/easing shocks, business cycle phases, and stock market volatility regimes. To identify monetary shocks, we use a theoretical vector autoregressive model of the US economy that accounts for the interconnectedness between monetary policy and the stock market, augmenting it to accommodate for unconventional monetary policy actions at the zero lower bound. Then, with local projections, we estimate the uncertainty responses of monetary policy and the stock market to such shocks. Our main findings suggest that monetary policy holds promising potential as an effective countercyclical tool to reduce uncertainties, through easing policies in recessions and tightening policies in expansions and/or tranquil stock market volatility regimes.

Suggested Citation

  • Blampied, Nicolás & Mahadeo, Scott Mark Romeo, 2023. "Uncertainties under monetary tightening and easing shocks and different market states," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002076
    DOI: 10.1016/j.frl.2023.103834
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    Cited by:

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    2. Kirimhan, Destan & Payne, James E. & AlKhazali, Osamah, 2024. "Herd behavior in U.S. bank stocks," Finance Research Letters, Elsevier, vol. 67(PB).

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    More about this item

    Keywords

    Business cycle; Monetary policy; Shocks; Stock market; Uncertainty; Volatility;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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