Working Paper: CEPR ID: DP8450
Authors: Sylvester C.W. Eijffinger; Ronald J. Mahieu; Louis Raes
Abstract: Deliberately or not, by providing its stance on the prospects of the economy, rationalizing past decisions or announcing future actions, central banks influence financial markets' expectations of its future policy. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion the effect is weak and on average negative. The response of equities to central bank talk depends critically on the business cycle. There are strong industry specific effects of monetary policy actions and communication. These industry effects relate to the variation in cyclicality of different industries. Firm-specific effects of monetary policy relate to the leverage, the size and the price-earnings ratio of firms.
Keywords: business cycle; credit channel; monetary policy; monetary policy announcements; stock market
JEL Codes: E44; E52; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank communication (E58) | stock prices (G12) |
| central bank communication (E58) | stock prices (for financially constrained firms in cyclical industries during recessions) (G32) |
| upward revision of future policy expectations (E60) | stock market response (G10) |
| central bank communication (E58) | stock prices (during expansions) (E30) |
| forward-looking statements introduction (Y20) | stock market responsiveness (G10) |
| monetary policy communication (E52) | stock market response (heterogeneous across industries and firms) (G19) |