Rules and Discretion in Monetary Policy: Is the Response of the Stock Market Rational?

Ion-Iulian Marinescu and Alexandra Horobet
Additional contact information
Ion-Iulian Marinescu: The Bucharest University of Economic Studies, Romania
Alexandra Horobet: The Bucharest University of Economic Studies, Romania

Expert Journal of Economics, 2015, vol. 3, issue 1, 50-62

Abstract: We investigate the effects of the monetary policy conduct on the domestic capital market for a sample of developed countries where the capital market plays a significant role in the economy. We break down the policy rate innovations in rules-based and discretionary components in order to determine the degree of prudentiality in the monetary policy conduct and we study their accounts with respect to capital market rationality. The rules-based component is determined using an interpolated vanilla Taylor-rule policy rate at the event date and the discretionary component is obtained by subtracting the rules-based rate from the target monetary policy rate innovation. Using an event study approach, we analyze the impact of monetary policy components on the returns of the stock market and we determine that the conduct of the monetary policy can cause irrational responses of the capital market. More than that, we show, for the analyzed countries, that if the general level of discretion in the monetary policy is high the response of the stock market becomes increasingly erratic, indicating that forward guidance may help reduce uncertainty on capital markets.

Keywords: monetary policy; event study; capital market efficiency; discretion; rules; forward guidance (search for similar items in EconPapers)
JEL-codes: D61 E43 E52 G14 G18 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://economics.expertjournals.com/wp-content/uploads/EJE_307marinescu50-62.pdf (application/pdf)
http://economics.expertjournals.com/23597704-307/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:exp:econcs:v:3:y:2015:i:1:p:50-62

Access Statistics for this article

More articles in Expert Journal of Economics from Sprint Investify
Bibliographic data for series maintained by Alin Opreana ( this e-mail address is bad, please contact ).