Application of Monetary Economics in Shaping Financial Market Dynamics
DOI: https://doi.org/10.70184/np3c6z93
Monetary Economics, Financial Market Dynamics, Monetary Policy, Interest Rates, Central Bank Communication
Abstract
This study explores the role of monetary economics in shaping financial market dynamics by examining how monetary policy decisions influence market behavior. Drawing on established theories in monetary transmission and financial economics, the study focuses on key policy-related factors, including interest rate adjustments, inflation expectations, and central bank communication strategies. A qualitative research design is employed through a comprehensive review of seminal and contemporary literature to synthesize theoretical perspectives and empirical findings. The analysis demonstrates that monetary policy plays a critical role in shaping market sentiment, risk-taking behavior, and asset price movements, particularly under conditions of heightened economic uncertainty. The study further discusses the concept of the “Greenspan Put” as an illustration of how perceived central bank interventions can affect investor expectations and market discipline. Emphasis is placed on the importance of transparent and credible communication by central banks in reducing information asymmetry, managing expectations, and mitigating excessive market volatility. The findings suggest that monetary policy effectiveness extends beyond traditional macroeconomic outcomes and significantly influences financial market stability. This study contributes to the literature by integrating monetary economics and financial market analysis, offering insights into the broader implications of policy actions. The research highlights the need for policymakers to account for behavioral and market-based responses when designing monetary policy frameworks to support long-term financial stability and sustainable economic growth.
References
Ball, L., & Sheridan, N. (2005). Does inflation targeting matter? NBER Working Paper No. 11610. https://doi.org/10.3386/w11610
Bernanke, B. S. (2002). Remarks by Governor Ben S. Bernanke. Board of Governors of the Federal Reserve System. https://doi.org/10.17016/FEDS.2002.39
Bernanke, B. S., & Blinder, A. S. (1988). Credit, money, and aggregate demand. American Economic Review, 78(2), 435–439. https://www.jstor.org/stable/1812788
Bernanke, B. S., & Kuttner, K. N. (2005). What explains the stock market’s reaction to Federal Reserve policy? The Journal of Finance, 60(3), 1221–1257. https://doi.org/10.1111/j.1540-6261.2005.00760.x
Bernanke, B. S., Laubach, T., Mishkin, F. S., & Posen, A. S. (1999). Inflation targeting: Lessons from the international experience. Princeton University Press.
Blanchard, O. J. (2016). Macroeconomics (7th ed.). Pearson Education Limited.
Blanchard, O. J. (2016). The interaction of monetary policy and fiscal policy. National Bureau of Economic Research. https://doi.org/10.3386/w24112
Borio, C., & Drehmann, M. (2009). Assessing the risk of banking crises – revisited. BIS Quarterly Review. https://www.bis.org/publ/qtrpdf/r_qt0906f.pdf
Brunnermeier, M. K., & Pedersen, L. H. (2009). Market liquidity and funding liquidity. Review of Financial Studies, 22(6), 2201–2238. https://doi.org/10.1093/rfs/hhn098
Campbell, J. Y., & Shiller, R. J. (1997). Valuation ratios and the long-run stock market outlook: An update. NBER Working Paper No. 8221. https://doi.org/10.3386/w8221
Case, K. E., & Shiller, R. J. (1987). Prices of single-family homes since 1970: New indexes for four cities. New England Economic Review, 23–44. https://www.jstor.org/stable/20070841
Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. Journal of Finance, 47(2), 427–465. https://doi.org/10.1111/j.1540-6261.1992.tb04398.x
Fisher, I. (1911). The purchasing power of money: Its determination and relation to credit, interest and crises. Macmillan.
Gordon, R. J. (1982). Inflation and the Phillips curve. Brookings Papers on Economic Activity, 1982(2), 357–394. https://doi.org/10.2307/2534426
Gürkaynak, R. S., Sack, B., & Swanson, E. T. (2005). Do actions speak louder than words? The response of asset prices to monetary policy actions and statements. International Journal of Central Banking, 1(1), 55–93. https://doi.org/10.2139/ssrn.626881
Gürkaynak, R. S., Sack, B., & Swanson, E. T. (2007). Market-based measures of monetary policy expectations. Journal of Business & Economic Statistics, 25(2), 201–212. https://doi.org/10.1198/073500106000000425
Kashyap, A. K., & Stein, J. C. (1995). The impact of monetary policy on bank balance sheets. Carnegie-Rochester Conference Series on Public Policy, 42, 151–195. https://doi.org/10.1016/0167-2231(95)90010-1
Mishkin, F. S. (1996). Understanding financial crises: A developing country perspective. Annual World Bank Conference on Development Economics, 4, 29–62. https://doi.org/10.1596/0-8213-3529-6
Mishkin, F. S. (2007). Monetary policy strategy: How did we get here? National Bureau of Economic Research. https://doi.org/10.3386/w13518
Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economic and Political Science/Revue canadienne de economiques et science politique, 29(4), 475–485. https://doi.org/10.2307/139336
Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. Journal of Political Economy, 103(3), 624–660. https://doi.org/10.1086/261992
Obstfeld, M., & Rogoff, K. (2002). Global implications of self-oriented national monetary rules. Quarterly Journal of Economics, 117(2), 503–535. https://doi.org/10.1162/003355302753650296
Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957. Economica, 25(100), 283–299. https://doi.org/10.2307/1880299
Reinhart, C. M., & Reinhart, V. R. (2016). The dangers of a global crackdown on tax evasion. American Economic Association. https://doi.org/10.1257/jep.30.4.3
Reinhart, C. M., & Reinhart, V. R. (2016). The global financial crisis: An introduction. International Journal of Economics and Finance, 8(10), 1–14. https://doi.org/10.5539/ijef.v8n10p1
Rey, H. (2013). Dilemma not trilemma: The global financial cycle and monetary policy independence. NBER Working Paper No. 21162. https://doi.org/10.3386/w21162
Ross, S. A. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13(3), 341–360. https://doi.org/10.1016/0022-0531(76)90046-6
Shiller, R. J. (2015). Irrational exuberance (3rd ed.). Princeton University Press.
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195–214. https://doi.org/10.1016/0167-2231(93)90009-L
Woodford, M. (2003). Interest and prices: Foundations of a theory of monetary policy. Princeton University Press.
Published
Issue
Section
License
Copyright (c) 2024 Imran Tajuddin, Tria Haryuni Dammar (Author)
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain the full copyright of their published articles. By submitting and publishing their work, authors grant Vifada Management and Social Sciences the right of first publication. All published articles are simultaneously licensed under the Creative Commons Attribution License (CC BY 4.0), which permits unrestricted use, distribution, and reproduction in any medium, provided that the original author(s) and the initial publication in this journal are properly acknowledged.
