From Free Markets to Fed Markets: How Unconventional Monetary Policy Impacts Equity Markets

32 Pages Posted: 8 Jun 2020 Last revised: 13 Oct 2020

See all articles by Tālis J. Putniņš

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: September 1, 2020

Abstract

In response to the COVID-19 pandemic, the US Federal Reserve almost doubled its balance sheet by adding $3 trillion of assets (13% of GDP) in the space of three months, constituting the most aggressive unconventional monetary policy on record. We show that these actions had a substantial effect on stock markets, accounting for one-third of the rebound in markets since March 2020 (increasing returns by 10-15%) and contributing to the apparent disconnect between stock prices and the economy. Using dynamic time-series models, we characterize the strong bi-directional symbiotic relation between the Fed’s balance sheet and stock markets.

Keywords: stock markets, monetary policy, quantitative easing, liquidity, COVID-19

JEL Classification: E58, E44, E52, G12, G14, C54

Suggested Citation

Putnins, Talis J., From Free Markets to Fed Markets: How Unconventional Monetary Policy Impacts Equity Markets (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3621460 or http://dx.doi.org/10.2139/ssrn.3621460

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

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Stockholm School of Economics, Riga ( email )

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