Monetary policy surprises, stock returns, and financial and liquidity constraints, in an exchange rate monetary policy system

John M. Sequeira

The Quarterly Review of Economics and Finance, 2021, vol. 81, issue C, 226-236

Abstract: This study examines the impact of monetary policy surprises on the stock price behaviour of a small developed economy, whose monetary policy is based on the exchange rate. We find that monetary policy surprises associated with all contractionary policy levers and a neutral policy lever, have a consistently significant and negative impact on stock returns. In comparison, only monetary policy surprises associated with a downward re-centering policy lever, has a significantly positive effect on stock returns. Using a recalibrated classification system, we also find that monetary policy surprises differ across sectors of the economy. Our results show how monetary policy surprises can have a significant impact on the stock market by having a disproportionate effect on sectors that face financial and liquidity constraints.

Keywords: Monetary policy; Sector classification; Financial constraints; Liquidity constraint (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 G14 G30 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:81:y:2021:i:c:p:226-236

DOI: 10.1016/j.qref.2021.06.005

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