Does Monetary Policy Have Long-term Effects On Stock Market Returns?

A lot of literatures have been working on the topic of the relationship between monetary policy and the asset prices. The previous literatures, however, usually study the short-term dynamic relationship between the monetary policy and the stock market return. Whether the monetary policy had a long-run effect on the stock market return was still remained unknown. Actually the long-term relationship subject is important for the policy makers and the financial market participant to estimate the efficiency of the policy or anticipate the future stock return.Based on the CAPM model, this paper studies the long-run relationship between the stock market return and short-term interest rate which stands for the monetary policy. The paper analyzes the data from 20 financial markets of the world. The result of ARDL model implies that in most of the case, the long-term relationship between stock market return and short-term interest rate are significant. The result shows that the short-term interest rate can be used to predict the expected stock market return.