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Stock market bubbles and monetary policy effectiveness

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  • Olga Fullana
  • Javier Ruiz
  • David Toscano

Abstract

In this paper, we provide evidence on the role of conventional monetary policy in the dynamics of stock market bubbles. We analyze the response of stock market returns to monetary policy shocks but condition the analysis on both the direction of monetary policy surprises and business conditions. Following a two-step approach, we first use a structural vector autoregressive (SVAR) model to identify a proxy variable of monetary policy shocks, and then we apply a conditional regression to contemporary stock market returns and these monetary policy shocks to extract the implicit relationship between these variables in different scenarios. Our results show that monetary policy does not impact on stock market returns in a significant form in the scenario defined by positive shocks and expansion periods, i.e. the lower effectiveness of restrictive monetary policy shocks coincides with the phase of the business cycle in which bubbles arise.

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  • Olga Fullana & Javier Ruiz & David Toscano, 2021. "Stock market bubbles and monetary policy effectiveness," The European Journal of Finance, Taylor & Francis Journals, vol. 27(10), pages 963-975, July.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:963-975
    DOI: 10.1080/1351847X.2020.1782960
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    Cited by:

    1. Yang, Jinyu & Dong, Dayong & Liang, Chao & Cao, Yang, 2024. "Monetary policy uncertainty and the price bubbles in energy markets," Energy Economics, Elsevier, vol. 133(C).

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