The dynamic impact of monetary policy on stock market liquidity

Xiaoyi Lyu and Hao Hu

Economic Analysis and Policy, 2024, vol. 81, issue C, 388-405

Abstract: Stock market liquidity is a crucial precondition for well-functioning financial markets, while monetary policy is an important determinant for Stock market liquidity. This paper examines the dynamic impact of monetary policy on stock market liquidity in the short, medium, and long run and the asymmetry of the impact in bull and bear markets. Time-varying parameter vector autoregressive model is applied to study the monetary policy and stock market liquidity of China over the period 1997–2018. The results show that the impact of monetary policy on stock market liquidity varies across time and markets. Expanding monetary policy can help replenish stock market liquidity only if stable liquidity expectations are established. Therefore, when the central bank intends to influence stock market liquidity by regulating funding liquidity, it first needs to strengthen the management of liquidity expectations to establish funding liquidity expectations and prevent the market from falling into a liquidity spiral.

Keywords: Market liquidity; Funding liquidity; Monetary policy; Liquidity spirals (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:81:y:2024:i:c:p:388-405

DOI: 10.1016/j.eap.2023.12.007

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