The Asymmetric Effects of Monetary Policy on Stock Market

Abstract

This paper shows that the effects of expansionary monetary policy on the U.S. stock market are asymmetric across different monetary policy phases and different stock market regimes. A Markov-switching dynamic factor model dates the periods of stock market regimes, and generates a new composite measure for overall stock market movements. A time-varying parameter analysis finds that an expansionary monetary policy such as an increase in monetary aggregates or a decrease in the Federal funds rate has positive impacts on stock returns only during the periods in which they are used as monetary policy targets by the Federal Reserve.