Essays on monetary policy and financial markets
This thesis provides a contribution to the analysis of the link between monetary policy and financial markets. It does so by combining elements from the finance and economics literature and developing areas of intersection which, to some extent, have been evolving in a rather autonomous manner. The thesis takes an empirical perspective and examines three main issues. The first regards the modelling of the short-term interest rate where models are presented that integrate finance contributions with the literature on monetary policy rules. The chapter concludes that there are non-linearities in the short-rate process and these are related to macroeconomic factors in a way consistent with a monetary policy rule. A second essay deals with the effect of monetary policy announcements, improving on previous contributions by extending the investigation to a broader set of instruments and using multivariate models of volatility to capture in a better way the complex interactions between monetary policy and financial markets. The issue of the endogeneity of monetary policy is also a main concern in the final essay of the thesis which examines the contribution of monetary policy shocks in explaining fluctuations in real stock prices in the G7. In this chapter, it is argued that previous approaches may suffer from an omitted variables problem. By including a minimum set of variables both for identifying monetary policy shocks and explaining real stock prices, the study concludes that monetary policy may make a stronger contribution to stock price fluctuations than what is usually found in similar studies.