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What is Monetary Policy, Interest Rates and Stock Markets about?

This chapter examines how monetary policy, in itself and through its dependence on the business cycle, affects prices on financial assets. The chapter shows that changes in the monetary policy rate affect yields on government bonds with longer maturity as well as corporate bonds. This typically dampens economic activity. Changes in monetary policy typically also have a negative impact on the stock market. The chapter discusses whether monetary policy in itself affects the stock market or whether it works via its effect on the business cycle. It turns out that economic activity in itself, and monetary policy in itself, both affect the stock market. It is important to be aware of both channels, i.e. how economic activity affects the stock market and how monetary policy affects the stock market.

Author

Jesper Rangvid

Publisher

Oxford University Press

Published

2021

Language

EN