Empirical evaluation of monetary policy transmission to stock markets and further transfer of macroeconomic shocks to the real sector

Abstract

The study focuses on revealing key monetary policy instruments that can influence stock market development and elaborating whether shocks from financial markets and other macroeconomic conditions are further transferred to the real sector, as expected under the monetary transmission mechanism. This paper is an extension of our previous theoretical and empirical research expanding to ten developed and eight developing economies for the period of 1999-2020 using panel data and vector autoregressive models, impulse response functions, and scenario analysis. Firstly, it was examined that actions of monetary policymakers were efficient for stimulating the development of stock markets mostly for developed countries, whereas stock indices in most developing countries seemed not to be sensitive to changes in monetary conditions. Using scenario analysis and impulse response functions, it was discovered that in developing countries, including Poland and Ukraine, an expansionary policy focused on increasing money supply would mitigate deceleration and facilitate the growth of stock indices in the next four quarters, whereas, in developed countries, including the USA, a decline in interest rates under expansionary regime would stimulate the development of stock markets. Finally, the evolution of financial markets together with macroeconomic, social, and political conditions was concluded to be a statistically important factor of economic growth, as initially expected.