An enquiry into the monetary policy and stock market shocks in the US

This paper investigates the nexus between the monetary policy shocks and stock price shocks during various economic cycles in the US, from the first quarter of 1982 to the fourth quarter of 2022. For the empirical analysis, S&P 500, real GDP per capita, GDP price deflator, and Effective Federal Funds Rate (FFR) are used as proxies for the financial market, the US output, inflation, and the interest rate respectively in estimating Vector autoregression (VAR) models. The results obtained are in line with the economic theory, at least for the responses to financial shocks, implying that a positive shock in the S&P 500 stock index represents an increase in the financial income of the US investors, which will lead to a positive impact on consumption and investment – the two major components of GDP. Given that understanding how monetary policy is designed and developed facing various historical events, associated with the largest and the most influential economy in the world, the findings of this paper have policy and managerial implications for economists, scholars and investors in not only the US but also the countries worldwide where the financial markets are profoundly influenced by the US policy changes, e.g., the frontier and emerging economies as well as the developed economies (e.g., the UK and the EU), especially countries with quote-driven stock markets (e.g., the UK).