تنوع در اثرات سیاست پولی بر بازده بازار سهام در چهار دهه گذشته

Stock prices are sensitive to monetary policy. However, the sensitivities are not stable over time. A drastic change in monetary policy can alter effects of monetary policy on stock returns. This study finds that stock prices can be affected by current changes, unexpected changes, or near-future changes in the funds/discount rates, due to different policy goals or targets in different periods. Specifically, this study provides empirical evidence that monetary policy influences the stock market in different ways in the 1960s, the 1970s, the Volcker and Greenspan periods.

The relationship between changes in the effective federal funds/discount rates and stock prices attracted numerous studies in the past three decades. Empirical evidence in the literature suggests that fluctuations in stock prices, from a long-run perspective, merely reflect alterations in some principal economic factors. As an indicator of fundamental economic changes, fluctuations in stock prices have received close attention from the Federal Reserve and become an influential factor in the determination of monetary policy (Bernanke & Gertler, 1999 and Rigobon & Sack, 2001). In their research, Rigobon and Sack (2001) find a significant contemporaneous and simultaneous response of monetary policy to stock market movement, that is, “a 5% rise (fall) in the S&P 500 index increasing the likelihood of a 25 basis point tightening (easing) by about a half”. On the other hand, many studies report that changes in the federal funds/discount rates can significantly affect or predict stock market returns by influencing forecasts of some financial variables (Patelis, 1997). Generally speaking, an increase in the funds/discount rates pushes up market-determined interest rates, then leads to a higher cost of capital and lower profitability, causing a negative response from the stock market. The significant impact of monetary policy has been detected by daily and intraday stock return data (Cook & Hahn, 1988, Jensen & Johnson, 1993, Smirlock & Yawitz, 1985 and Waud, 1970), monthly and quarterly data (Jensen & Johnson, 1995), and international stock return data (Conover et al., 1999a, Conover et al., 1999b, Conover et al., 2005 and Durham, 2001). When innovations in the federal funds rate and nonborrowed reserves are used as the proxies for monetary policy, Thorbecke (1997) finds evidence that monetary policy exerts large effects on ex-ante and ex-post stock market returns. Further, Jensen and Mercer (2002) report that changes in the funds/discount rates can significantly affect the cross-section of expected stock returns. Some studies find that the relationship between monetary policy and stock returns is consistent. For example, Conover et al. (2005) conclude that periods of expansive monetary policy are associated with strong stock performance, whereas periods of restrictive monetary policy generally coincide with weak stock performance, and “the mid-1990s” is the only exception over the period of July 19, 1962 to January 2, 2001. However, according to Durham, 2001, Durham, 2003a and Durham, 2003b, the impact of monetary policy on stock returns is “less sturdy” and highly sensitive to alternative proxies of both monetary policy and stock returns as well as the selection of the sample period. In his cross-country study (2001), Durham finds that changes in the discount rate have a significant impact on stock returns for the sample period of 1956–2000. Nevertheless, the impact is insignificant for a subperiod of 1956–1970. His results suggest that the relationship between monetary policy and stock market returns may be unstable or time-varying. Although this instability issue is important, there are no further studies in the literature to analyze how and why the relationship varies over time. The instability of the effect of monetary policy on stock prices may be a result of drastic changes in monetary policy. There were many shifts in the U.S. monetary policy in the Federal Reserve history. In different economic periods, policy makers face different economic tasks, therefore, they have to use creative tools and approaches to formulating and implementing monetary policy. This time-varying nature of monetary policy specifies different forms of the relationship between monetary policy and stock market returns over different periods. In addition, sensitivity of stock market returns to economic fundamentals may be different under different economic and political conditions. Given the instability on both sides of the equation, this paper hypothesizes that the functional forms and significance of monetary policy on stock market returns vary over time. The major objectives of this study are to define different measures (functional forms) to quantify the relationship between monetary policy and stock prices, and empirically examine how these different measures change over time in the recent four decades.

Major shifts in monetary policy can essentially shape the time-varying relationship between monetary policy and stock prices through changes in the funds/discount rates, unexpected rates changes, and near-future rates changes. These three forms of the relationship may play different roles in affecting stock prices, due to different policy goals or targets in different periods. Free reserves were the target of monetary policy in the 1960s, accordingly, the funds/discount rates were not perceived as indications of money market conditions. Therefore, all three effects of the funds/discount rates on stock market returns were insignificant. In the 1970s, the target of monetary policy switched from free reserves to the funds rate. As a result, current changes in the funds/discount rates became a powerful factor in determining stock prices. During the battle against “stagflation”, the focus of monetary policy often swung between inflation and the economy's weaknesses. The unstable policy increased the influence of unexpected changes in the funds rate on stock returns. The Federal Reserve was reluctant to make any big changes in the funds rate during the period. Accordingly, the significant influence of near-future changes in the funds rate on stock prices in the 1970s merely reflected the fact that adjustments in the funds rate often lagged behind market forces. Drastic policy changes in Volcker's first term as Chairman of the Federal Reserve completely eliminated conservative and hesitant policy procedures. The funds/discount rates were much higher than that in the 1970s. Current changes in these rates kept their substantial influence on stock prices. However, at the same time, the target of monetary policy switched to nonborrowed reserves. It means that market participants must figure out changes in the funds rate by themselves. As a result, unexpected alterations in the funds rate remained an influential factor in the stock market. Monetary policy actions under the nonborrowed reserve targeting were not immediately apparent to the market. The nontransparency of monetary policy determined that changes in the lead-terms of funds/discount rates could not significantly affect stock prices. In Volcker's second term, borrowed reserves became the target of monetary policy. The funds rate was allowed a much smaller degree of variation and even less transparency under the borrowed reserve targeting procedures than the previous nonborrowed reserve targeting procedures. As a result, all three effect measures of the funds/discount rates on stock market returns were insignificant. Although the target of monetary policy switched back to the funds rate in the late 1980s, it was not managed as closely as in the 1970s. Changes in the funds rate, therefore, could not meaningfully affect stock prices in the Greenspan period (1987–2000). Nevertheless, a new policy procedure that took into effect in 1994 made the stock market more sensitive to near-future changes in the funds/discount rates, due to the greatly increased transparency and forward-looking in monetary policy. Overall, this study finds evidence that monetary policy plays an important role in explaining variations in stock prices in the past four decades. The finding is consistent with many previous studies. More importantly, evidence of this study clearly indicates that monetary policy may affect stock returns in different ways in different periods, due to major shifts in monetary policy. For example, both current and unexpected changes in monetary policy had important effects on stock returns in the Volcker period; however, only lead changes in monetary policy may significantly influence stock prices in the Greenspan period.