Optimal Monetary Policy and Stock Market Fluctuations

Abstract

This paper assesses the link between central bank's policy rate, inflation rate and output gap through Taylor rule equation in both United States and United Kingdom from 1990 to 2020. Also, it analyses the relationship between monetary policy and asset price volatility using an augmented Taylor rule. According to the literature, there has been a discussion about the utility of using asset prices to evaluate central bank monetary policy decisions. First, I derive the equation coefficients and examine the stability of the relationship over the shocking period. Test the model with actual data to see its robustness. I add asset price to the equation in the next step, and then test the relationship by Normality, Newey-West, and GMM estimator tests. Lastly, I conduct comparison between USA and UK results to find out which country's policy decisions can be explained better through Taylor rule.

Effect of Monetary Policy on the Performance of the Nigerian Capital Market (1986 – 2016): Stylized Facts from ARDL Approach

“…The importance of monetary policy in macroeconomic management directs the intention and considerable interest of researchers and policy makers to find out the impact of monetary policy on stock market performance in developing and developed countries [4]. In the wake of the recent global financial crisis, evidence shows that asset price bubbles and their collapse typically precede financial crises signalling a strong consensus about the importance of achieving a low and stable inflation rate as the main goal of monetary policy in the last two [5].…”

New JLS-Factor Model versus the Standard JLS Model: A Case Study on Chinese Stock Bubbles

“…Theoretically, in the context of the transmission mechanism, monetary policy affects stock prices mainly through both the traditional interest rate channel [40] and the credit channel [41]. A number of empirical studies have applied different proxy variables to assess the effects of monetary policy shocks on stock market volatility, including the discount rate [42][43][44][45] (Mercer and Johnson, 1996), Federal Funds rate [46][47][48][49][50][51][52][53][54], interest rate [55][56][57][58][59][60][61][62] (Octavioet al, 2013), money supply [63][64][65][66], and Federal Funds futures [67][68][69][70][71][72][73][74][75].…”