The Effect of Monetary Policy on Monthly and Quarterly Stock Market Returns

42 Pages Posted: 10 Dec 2001

Date Written: October 2001


Several studies report an empirical link between changes in monetary policy and short- as well as long-run stock market performance in the United States. Such findings are germane both to the study of market anomalies and to monetary policy transmission mechanisms. Previous univariate time-series results on long-run data, which use the discount rate as the main policy indicator, seem robust to alternative specifications of stock price returns given data on 16 countries from 1956 through 2000. However, out-of-sample tests indicate that the relation has largely decreased over time. Also, panel regressions, which notably include cross-sectional variance and therefore are particularly relevant to market participants, suggest that the relation is less sturdy, and consideration of excess as opposed to raw equity price returns in time-series regressions indicates no relation. Finally, alternative measures of central bank policy suggest a weaker and a diminished correlation between monetary policy changes and long-run stock market performance.

Keywords: Monetary policy, stock market returns

JEL Classification: E52, G14

Suggested Citation

Durham, J. Benson, The Effect of Monetary Policy on Monthly and Quarterly Stock Market Returns (October 2001). FEDS Working Paper No. 2001-42. Available at SSRN: or

J. Benson Durham (Contact Author)

affiliation not provided to SSRN

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