Monetary policy and stock prices: theory and evidence

Stefano Neri

No 513, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The objective of this paper is to evaluate the effects of monetary policy shocks on stock market indices in the G-7 countries and Spain using the methodology of structural VARs. A model is estimated for each country and the effects of monetary policy shocks are evaluated by means of impulse responses. A contractionary shock has a negative and temporary effect on stock market indices. There is evidence of a significant cross-country heterogeneity in the persistence, magnitude and timing of the responses. A limited participation model with households trading in stocks is set up and the responses of stock prices to a monetary policy shock under different rules are evaluated. The model is able to account for the empirical response of stock prices to monetary policy shocks under different policy rules.

Keywords: monetary policy; stock prices; structural VAR; limited participation model (search for similar items in EconPapers)
JEL-codes: C32 E52 G12 (search for similar items in EconPapers)
Date: 2004-07
New Economics Papers: this item is included in nep-cba, nep-fin, nep-fmk, nep-mac, nep-mon and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_513_04

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