Monetary policy and stock market theory and empirical evidence

This paper gives a comprehensive review of the literature on the interaction between real stock returns, inflation, and money growth, with a special emphasis on the role of monetary policy.

This is an area of research that has interested monetary and financial economists for a long time.

Monetary economists have been interested in the question whether money has any effect on real stock prices, while financial economists have investigated whether equity is a good hedge against inflation. Empirical studies show that money can be helpful in predicting future stock returns. Empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run. The short-run negative relation between stock returns and inflation can easily be explained by theoretical models.

If the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns, while if it conducts a procyclical policy we could observe a positive relation. According to both theoretical and empirical studies investors receive an inflation risk premium for holding equity. Copyright by Blackwell Publishers Ltd. If you experience problems downloading a file, check if you have the proper application to view it first.

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Bibliographic Info Article provided by Wiley Blackwell in its journal Journal of Economic Surveys. References References listed on IDEAS Please report citation or reference errors toorif you are the registered author of the cited work, log in to your RePEc Author Service profileclick on "citations" and make appropriate adjustments.: Evidence that monetary policy matters ," Journal of MacroeconomicsElsevier, vol.

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Monetary Policy and the Stock Market: Theory and Empirical Evidence

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References listed on IDEAS Please report citation or reference errors toorif you are the registered author of the cited work, log in to your RePEc Author Service profileclick on "citations" and make appropriate adjustments.: Full references including those not matched with items on IDEAS. Citations are extracted by the CitEc Projectsubscribe to its RSS feed for this item. This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

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