Working Paper: CEPR ID: DP8090
Authors: Luc Laeven; Hui Tong
Abstract: This paper studies how U.S. monetary policy affects global stock prices. We find that global stock prices respond strongly to changes in U.S. interest rate policy, with stock prices increasing (decreasing) following unexpected monetary loosening (tightening). This impact is more pronounced for sectors that depend on external financing, and for countries that are more integrated with the global financial market. These findings suggest that financial frictions play an important role in the transmission of monetary policy, and that U.S. monetary policy influences global capital allocation.
Keywords: Asset Allocation; Asset Prices; Financial Constraints; Monetary Policy; Monetary Transmission
JEL Codes: E44; F36; G14; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unexpected monetary loosening (E49) | Increase in stock prices (G10) |
| Unexpected tightening (E32) | Decrease in stock prices (G10) |
| Unexpected monetary loosening (E49) | Increase in stock prices for firms with high financial dependence (G32) |
| Unexpected monetary loosening (E49) | Increase in stock prices during recession periods (E32) |
| Monetary shocks (E39) | Stock price response varies across countries based on financial integration (G15) |