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The research paper "Monetary Policy and its Effects on Stock Markets" states that Catastrophe of 1987 – On October 19, 1987, the stock market along with the associated futures and options market crashed, with the S&P 500 stock market index falling about 20 percent. …
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During a state of inflation, the purchasing power of money decreases. The effects of inflation are harmful to the economy. Not only does it affect the economy, but also tends to affect the value of stocks, since money loses its value. Higher inflation would tend to depress stock returns because it would raise long-term interest rates (and thereby raise the rate at which investors discount future dividends).
Monetary Policy - Monetary Policy is a means to control inflation, one of the corrective tools of the Central Bank of a country. The presence of inflation in the current market and expected future requires the need for such a policy to ensure that inflation rates do not go above a specific percentage thus acting as a tool to curb inflation. 1. Inflation Targeting – Inflation targeting is a policy that is implemented to keep inflation under a particular range. It targets the Consumer Price Index (CPI) which measures the average price of consumer goods and services purchased by households. A change in the CPI is an indicator of inflation hence inflation targeting aims at maintaining the CPI within a specific range. 2. Price Level Targeting – It is similar to inflation targeting, the only difference is the CPI growth in one year is offset in subsequent years so that over time, the price level on aggregate does not move.
Despite claims that monetary policy should not affect stocks, there is evidence that the policy can affect real stock prices in the short-run (Bernanke & Kuttner 2005) and also an opinion that the nature of the monetary policy regime can affect the performance of asset markets over longer horizons. It has also been observed that by altering the path of expected dividends, the discount rate or the equity premium is one of the effects of the monetary policy on stocks1 Observers of Financial Markets have noted that an unexpected decrease in the federal funds rate target leads to a rapid and positive reaction in stock prices thus implying the effect of the Monetary Policy on Stock Markets.
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Many papers have found that the extent to which monetary policymakers react to stock market changes are often driven by other factors such as the rate of inflation and output gap. In most of the cases, stock market changes are rarely the aspects which influence monetary policy. The present paper attempts to examine this very fact through employing least square methods. In order to assess this relation, Taylor’s rule has been modified accordingly. The output however, yielded does not depict a highly significant association between stock market fluctuations and the dependent variable, monetary policies which is duplicated by Federal Funds Rate. 1 - Introduction Stock market fluctuations often decide the financial state of an economy...
... primarily asks how should the monetary authority set itspolicy to react to volatility in the stockmarket. This translates into the query of whether equity price levels as measured by indices such as the Dow Jones or the Standard and Poor 500 should be targeted explicitly by monetarypolicy or not. Most macroeconomists however are of the opinion that pursuing these queries is not worthwhile since targeting stockmarket prices requires identification of what the fundamental prices of an asset is before the extent to which the actual price has deviated from the fundamental or target price can be identified. In other words, ex-ante identification of a stockmarket bubble is extremely difficult. Since the fundamental price of a stock...
...?MonetaryPolicy and the StockMarket Contents 2 Contents 3 Introduction 3 Literature Review 5 Empirical Framework 8 Data Description 16 China 16 United States 17 Empirical Results 17 Conclusion 17 References 18 Introduction Research on monetarypolicy and their effect on stockmarket are important as it will explain the purpose of monetarypolicy in promoting price stability and moderate interest rates. Determining the impact of monetarypolicy to stockmarket will enable market analyst to predict stock movements. Trending and predicting movements of economic indicators will enable market analyst to determine foreign exchange trends. For economic planners it is imperative to model the optimum monetarypolicy to ensure...
...? FINANCIAL MARKETS AND MONETARYPOLICY By The of the The of the School The City and State where it is located The Date Introduction This is the Broad word that describes any market whereby there are consumers and vendors who in this case participates in the job of possessions such as shares, bonds and currencies and the derivatives. The markets are however characteristically distinct by taking the clear pricing, the basic rules and guidelines for trading, expenses and fees and the market powers that determine the amounts of securities that are able to trade. However, some financial marketplaces are only giving authority to participants that meet positive standards, which in this case can be found on the issues like the quantity of money...
...? FINANCIAL mARKETS AND mONETARY THEORY al Affiliation) Key words: MonetaryPolicy, Financial Market Term Structure of Interest Rates The interest rates’ term structure and economy are closely related. Conversely, the anticipations of real activity and future inflation can be crucial in determining the yield curve. However, the yield curve can have a predictive power and strength for both real activity and inflation. The strong relationship between macro economy and the yield curve has been the conventional theme of a growing empirical theory (Stander, 2005). Various theories have been generated to show that the relationship is bi-directional; Nelson Siegel model. Other research has offered a concrete evidence favoring instability...
... is about based on a chapter in the textbook written by Elton, Gruber, Brown, and Goetzmann, and provides a critical assessment of its implications for the investor.
Efficient Capital Markets Hypothesis: an explanation and critical assessment
as applied to stockmarkets
Hypothesis being the Greek word for "assumption", the Efficient Markets Hypothesis therefore assumes that capital markets, of which the stock or equity market is one, is efficient. And what we mean when we say that a market is efficient is that buyers and sellers of stocks have all the relevant information they need to make an intelligent decision to either buy or sell stocks in companies at a certain price that reflects all available information.
The first to propose...
Monetary Policy - Wages, Markets and Income What major economic indicators would you look at the most if you were planning on mortgaging a home or financing another large purchase Based on Woodruff's article, one of the primary factors, which would influence my decision to mortgage my home or finance the purchase of a big-ticket item, would be the interest rate. This is because apart from paying the principal in servicing resulting debt, I would also need to pay interest expense that is tantamount to the cost of borrowing. This is mainly determined by the interest rate. In return, the interest rate may be derived through the key economic indicators such as the inflation, unemployment rate and gross domestic product (GDP).
The MPC determines the monetarypolicy for the country at large to meet the inflation objective of the state. Variations in the rates of interests and asset purchases funded by remitting reserves through QE, unmistakably has implication of distribution. In case the Bank does not make asset purchase, most individuals in the UK would have been in a worst situation. Growth of economy would have been at a lower level. The unemployment rate would have been at its highest level and majority of the firms would have been put out of business. This would eventually lead to a considerable damaging impact on the pensioners, savers and house markets. All evaluations of the impact of asset purchases must be perceived in this dimension. The asset...
The effect of 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 with respect to defining the future of economics. It is evident that 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 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 help to define market action but also the foreign economic policy that impacts the stock price and volatility of the...
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