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The Impact of Monetary Policy on the U.S. Stock Market since the COVID-19 Pandemic

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  • Willem Thorbecke

    (Research Institute of Economy, Trade and Industry, Tokyo 100-8901, Japan)

Abstract

Inflation in 2021 and 2022 grew much faster than the Federal Reserve expected. The Fed downplayed inflation in 2021 and then increased the federal funds rate by 500 basis points between March 2022 and May 2023. This paper investigates how this unprecedented tightening has impacted the stock market. To do so, it estimates a fully specified multi-factor model that measures the exposure of 53 assets to monetary policy surprises over the 1994 to 2019 period. It then uses the monetary policy betas to gauge investors’ beliefs about monetary policy between 2020 and 2023. The results indicate that changing perceptions about monetary policy multiplied uncertainty and stock market volatility.

Suggested Citation

  • Willem Thorbecke, 2023. "The Impact of Monetary Policy on the U.S. Stock Market since the COVID-19 Pandemic," IJFS, MDPI, vol. 11(4), pages 1-15, November.
    • Handle: RePEc:gam:jijfss:v:11:y:2023:i:4:p:134-:d:1276520
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    References listed on IDEAS

    as
    1. Anil K Kashyap & Jeremy C. Stein, 2023. "Monetary Policy When the Central Bank Shapes Financial-Market Sentiment," Journal of Economic Perspectives, American Economic Association, vol. 37(1), pages 53-76, Winter.
    2. McElroy, Marjorie B & Burmeister, Edwin, 1988. "Arbitrage Pricing Theory as a Restricted Nonlinear Multivariate Regression Model: Iterated Nonlinear Seemingly Unrelated Regression Estimates," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(1), pages 29-42, January.
    3. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
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