Stock Market Bubbles and Monetary Policy Effectiveness

In this paper we provide evidence on the response of stock prices to monetary policy shocks, but conditioning the analysis to the direction of the monetary policy surprises and to the business conditions. We follow a two steps approach: First we use the SVAR approach to identify monetary policy shocks; and then we conduct regression analyses of contemporary stock market returns and monetary policy shocks in order to extract the implicit relationship between these variables in the four scenarios defined. Our results show that monetary policy do not impact on stock market returns in a significant form in the scenario defined by a positive shock and an expansion period, coinciding the poor effectiveness of monetary policy tightening with the phase of the business cycle in which bubbles arise.