Essays on monetary policy and financial markets

This dissertation analyzes certain aspects of the interaction between monetary policy and financial markets. The first two essays identify the contemporaneous responses between policy rates and financial markets (stocks and Treasury yields) within a structural VAR context. The third essay investigates the effect of monetary policy on the negative relation between inflation and stock returns for a group of industrialized countries.; The first chapter proposes an identification methodology that allows estimation of contemporaneous responses between stock prices and policy rates. To achieve identification, the methodology combines high frequency futures data with the VAR methodology. Our empirical findings indicate that the simultaneous responses between policy rates and the stock market are statistically significant, with stock prices declining by 6.5% in response to a 25 basis point increase in fed funds rates, and policy rates rising by 12 basis points in response to a 5% increase in stock prices.; Chapter 2 applies the same identification methodology to estimate contemporaneous responses between the term structure and monetary policy. Identification is achieved by combining VAR methodology with intra-day price changes in Treasury futures around policy announcement time. Our results indicate that a 25 basis point increase in policy rates causes a sharp rise in the short-end of the curve and moderate response in the long-end. More interestingly, a 1% rise in 3-month rate elicits a 25 basis point increase in the fed funds rate with this response declining as we move along the yield curve. Both responses are statistically significant.; The third chapter investigates the effect of monetary policy on the negative relation between inflation and stock returns. We find that both policy shocks and the type of policy regime have a significant influence on this relationship. Our results also indicate that, for all countries, the negative relationship between inflation and stock returns has declined during the most recent regimes. We interpret the negative relationship between inflation and stock returns to proxy for the negative relationship between stock returns and anticipated monetary policy and attribute recent declines in this relationship to the manner in which policy is carried out during recent regimes.