European Monetary Policy and Stock Market - Essay Example

There is a common approach taken up the analysts and investors to study monetary policies as they believe that changes in the monetary policy especially unexpected changes impact the returns from the stock market thus affecting the stock prices. The effect of the global market and the integration of the financial markets shows the effect on the stock market and economy due to the changes in monetary policies have profound impacts on defining the future of economics. Local stock markets would feel the effects of change in the monetary policies; however, the level of impact would be different in other regions - especially within different economic sectors that might not have the same level of effect (Nuno & Claudio, 2002).

Thus analysts and economists around the world believe that it is not only monetary policy and foreign policy that helps to define market action but also the foreign economic policy that impacts the stock price and volatility of the stock market. From such an understanding, it must also be noted that it is the central bank that designs the monetary policy for any region to control the macroeconomic factors and devise a holistic strategy for the economy. It has been the volatility of the stock market that has increased the focus on the role of central banks in helping to prevent or reduce the disruptive effects of financial shocks on the economy (Bernanke, 1999).

It is also required to be understood that role of stock prices should be defined and the monetary policy should take into account the stock prices; because whether related or not to the fundamentals can have a destabilizing effect on the economy. Many analysts represent the view that to ensure the long-term success of the monetary policy price stability must be ensured; thus integrating the role of the stock market into the monetary policy (Lawrence, et al., 2010).

This integration would allow the central bank to prevent the volatility of the stock market and ensure economic stability.