Equity market and the transmission channels of monetary policy: Before and after the zero lower bound

We examine the effectiveness of the interest rate channel and the credit channel of monetary policy before and after the zero lower bound (ZLB), using intraday stock returns. We construct a number of industry-specific and firm-specific indicators to capture the sensitivity of firms' demand to interest rates (interest rate channel) and firms' financial constraints (credit channel). We find that the transmission of monetary policy has shifted across both periods. Conventional monetary policy works through both the neoclassical interest rate channel and the credit channel, while unconventional policy is propagated primarily via the credit channel which became even more effective at the ZLB. Before the ZLB the transmission channels operate primarily through target rate shocks rather than forward guidance announcements, whereas both forward guidance and large scale asset purchases were equally important for the credit channel at the ZLB. We also find strong evidence that transmission channels are asymmetric depending on the state of the stock market (bull/bear, tighter/easier credit conditions, high/low volatility), and the type of policy surprises (positive/negative). Our findings are robust with respect to a number of model extensions and alternative specifications.