Taking Stock: Monetary Policy Transmission to Equity Markets

48 Pages Posted: 22 Oct 2004

See all articles by Michael Ehrmann

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Date Written: May 2004


This paper analyses the effects of US monetary policy on stock markets. We find that, on average, a tightening of 50 basis points reduces returns by about 3%. Moreover, returns react more strongly when no change had been expected, when there is a directional change in the monetary policy stance and during periods of high market uncertainty. We show that individual stocks react in a highly heterogeneous fashion and relate this heterogeneity to financial constraints and Tobin's q. First, we show that there are strong industry-specific effects of US monetary policy. Second, we find that for the individual stocks comprising the S&P500 those with low cashflows, small size, poor credit ratings, low debt to capital ratios, high price-earnings ratios or high Tobin's q are affected significantly more. The use of propensity score matching allows us to distinguish between firmand industry-specific effects, and confirms that both play an important role.

Keywords: monetary policy, stock market, credit channel, Tobin's q, financial constraints, S&P500, propensity score matching

JEL Classification: G14, E44, E52

Suggested Citation

Ehrmann, Michael and Fratzscher, Marcel, Taking Stock: Monetary Policy Transmission to Equity Markets (May 2004). Available at SSRN: https://ssrn.com/abstract=533023. or http://dx.doi.org/10.2139/ssrn.533023

Michael Ehrmann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
+49 69 1344/7327 (Phone)
+49 69 1344/6000 (Fax)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9

Marcel Fratzscher

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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