Macroeconomic Cycles and the Stock Market's Reaction to Monetary Policy

33 Pages Posted: 13 Feb 2008

See all articles by Arabinda Basistha

Arabinda Basistha

West Virginia University - College of Business & Economics

Alexander Kurov

West Virginia University - College of Business & Economics

Date Written: January 2008

Abstract

This paper examines cyclical variation in the effect of Fed policy on the stock market. We find a much stronger response of stock returns to unexpected changes in the Federal funds target rate in recession and in tight credit market conditions. Using firm-level data, we also show that firms that face financial constraints are more affected by monetary shocks in tight credit conditions than the relatively unconstrained firms. Overall, the results are consistent with the credit channel of monetary policy transmission.

Keywords: Monetary policy, stock market, business cycle, credit channel

JEL Classification: E44, E52, G14, G18

Suggested Citation

Basistha, Arabinda and Kurov, Alexander, Macroeconomic Cycles and the Stock Market's Reaction to Monetary Policy (January 2008). Available at SSRN: https://ssrn.com/abstract=1092246 or http://dx.doi.org/10.2139/ssrn.1092246

Arabinda Basistha

West Virginia University - College of Business & Economics ( email )

Morgantown, WV 26506-6025
United States

Alexander Kurov (Contact Author)

West Virginia University - College of Business & Economics ( email )

P.O. Box 6025
Morgantown, WV 26506
United States

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