Monetary policy surprises, stock returns, and financial and liquidity constraints, in an exchange rate monetary policy system

• Main Author: SEQUEIRA, John M.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Monetary policy; Sector classification; Financial constraints; Liquidity Constraint; Asian Studies; Economic Policy; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6731; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7730/viewcontent/Monetary_policy_surprises_av.pdf
• Institution: Singapore Management University

This study examines the impact of monetary policy surprises on the stock price behaviour of a small developed economy, whose monetary policy is based on the exchange rate. We find that monetary policy surprises associated with all contractionary policy levers and a neutral policy lever, have a consistently significant and negative impact on stock returns. In comparison, only monetary policy surprises associated with a downward re-centering policy lever, has a significantly positive effect on stock returns. Using a recalibrated classification system, we also find that monetary policy surprises differ across sectors of the economy. Our results show how monetary policy surprises can have a significant impact on the stock market by having a disproportionate effect on sectors that face financial and liquidity constraints.