Main Article Content
Abstract
This study investigates the intricate relationship between financial markets and monetary economics, aiming to analyze its dynamics and implications comprehensively. The research synthesizes theoretical frameworks encompassing monetarist, New Keynesian, and behavioral economics perspectives alongside empirical evidence on market reactions to monetary policy and the effectiveness of unconventional measures. Critical debates on forward guidance and financial market imperfections are explored, highlighting challenges and opportunities for policy effectiveness. Employing a mixed-methods approach, quantitative analysis and qualitative insights from market participants elucidate the nuanced mechanisms underlying this relationship. Findings underscore the pivotal role of central bank actions in shaping financial market outcomes and investor behavior, emphasizing the importance of effective communication and policy frameworks. Implications for monetary policy formulation and financial stability are discussed, emphasizing the need for transparent communication and policy frameworks to foster well-functioning financial markets and support macroeconomic stability.
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References
- Adrian, T., & Shin, H. S. (2010). Liquidity and leverage. Journal of Financial Intermediation, 19(3), 418–437. https://doi.org/10.1016/j.jfi.2010.04.003
- Aysan, A. F. (2020). The potential impact of blockchain technology on the global financial system. Journal of Economic Surveys, 34(3), 631–651. https://doi.org/10.1111/joes.12374
- Ball, R. (1994). What determines the behavior of stock prices? Journal of Monetary Economics, 34(2), 101–139. https://doi.org/10.1016/0304-3932(94)90047-7
- Bernanke, B. S., & Blinder, A. S. (1992). The Federal funds rate and the channels of monetary transmission. American Economic Review, 82(4), 901–921. https://doi.org/10.3386/w3272
- Bernanke, B. S., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4), 27–48. https://doi.org/10.1257/jep.9.4.27
- Bernanke, B. S., Reinhart, V. R., & Sack, B. P. (2004). Monetary policy alternatives at the zero bound: An empirical assessment. Brookings Papers on Economic Activity, 2004(2), 1–100. https://doi.org/10.1353/eca.2005.0001
- Blanchard, O. J., & Fischer, S. (1989). Lectures on macroeconomics (1st ed.). The MIT Press.
- Borio, C., Furfine, C., & Lowe, P. (2001). Procyclicality of the financial system and financial stability: Issues and policy options. BIS Papers, 1, 1–57. https://doi.org/10.2139/ssrn.281956
- Campbell, J. Y., Lo, A. W., & MacKinlay, A. C. (1997). The econometrics of financial markets. Princeton University Press.
- Cantú, C. (2020). The implications of financial market development on financial stability, particularly in emerging markets. Emerging Markets Review, 45, 100720. https://doi.org/10.1016/j.ememar.2020.100720
- Cecchetti, S. G., Kohler, M., & Upper, C. (2011). Financial crises and economic activity. Economic Inquiry, 49(4), 1040–1051. https://doi.org/10.1111/j.1465-7295.2010.00351.x
- Diamond, D. W., & Rajan, R. G. (2001). Liquidity risk, liquidity creation and financial fragility: A theory of banking. Journal of Political Economy, 109(2), 287–327. https://doi.org/10.1086/319552
- Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17. https://doi.org/10.3386/w1454
- Gabaix, X. (2018). Behavioral macroeconomics via sparse dynamic programming. NBER Macroeconomics Annual, 32(1), 79–140. https://doi.org/10.1086/697019
- Gagnon, J., Raskin, M., Remache, J., & Sack, B. (2011). The financial market effects of the Federal Reserve’s large-scale asset purchases. International Journal of Central Banking, 7(1), 3–43. https://doi.org/10.3386/w13706
- Gertler, M., & Karadi, P. (2015). Monetary policy surprises, credit costs, and economic activity. American Economic Journal: Macroeconomics, 7(1), 44–76. https://doi.org/10.1257/mac.20130100
- Hendershott, T., & Riordan, R. (2013). Algorithmic trading and information. Journal of Finance, 68(5), 1–33. https://doi.org/10.1111/jofi.12025
- Kiyotaki, N., & Moore, J. (1997). Credit cycles. Journal of Political Economy, 105(2), 211–248. https://doi.org/10.1086/262072
- Menkveld, A. J. (2013). High frequency trading and the new market makers. Journal of Financial Markets, 16(4), 712–740. https://doi.org/10.1016/j.finmar.2013.07.003
- Obstfeld, M., & Rogoff, K. (2001). The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? In NBER Macroeconomics Annual 2000, Volume 15 (pp. 339-412). MIT Press. https://doi.org/10.3386/w7777
- Obstfeld, M., & Taylor, A. M. (2004). Global capital markets: Integration, crisis, and growth. Journal of Monetary Economics, 51(5), 951–974. https://doi.org/10.1016/j.jmoneco.2003.09.011
- Qizi, A. (2022). Increasing interest in Islamic finance. Islamic Economic Studies, 30(1), 1–20. https://doi.org/10.35632/2538-0202.1060
- Rey, H. (2013). Dilemma not trilemma: The global financial cycle and monetary policy independence. NBER Working Paper Series, No. 21162. https://doi.org/10.3386/w21162
- Rey, H. (2016). International channels of transmission of monetary policy and the Mundellian trilemma. In J. B. Taylor & H. Uhlig (Eds.), Handbook of Macroeconomics (Vol. 2, pp. 1873–1970). Elsevier. https://doi.org/10.1016/bs.hesmac.2016.09.002
- Shiller, R. J. (2015). Irrational Exuberance. Princeton University Press. https://doi.org/10.2307/j.ctt7t2zv
- Silva, T. (2020). Emerging market local currency bond markets: A review. BIS Quarterly Review, September 2020. Bank for International Settlements. https://www.bis.org/publ/qtrpdf/r_qt2009e.htm
- Silva, T. (2020). The growth of local currency bond markets in emerging economies. Journal of International Money and Finance, 109, 102235. https://doi.org/10.1016/j.jimonfin.2020.102235
- Svensson, L. E. O. (2009). Evaluating monetary policy. In B. M. Friedman & M. Woodford (Eds.), Handbook of Monetary Economics (Vol. 3, pp. 547–669). Elsevier. https://doi.org/10.1016/S1573-4420(08)03009-5
- Woodford, M. (2005). Central bank communication and policy effectiveness. Bank of Japan Monetary and Economic Studies, 23(October), 73–112. https://www.boj.or.jp/en/research/brp/ron_2005/data/ron0503a.pdf
References
Adrian, T., & Shin, H. S. (2010). Liquidity and leverage. Journal of Financial Intermediation, 19(3), 418–437. https://doi.org/10.1016/j.jfi.2010.04.003
Aysan, A. F. (2020). The potential impact of blockchain technology on the global financial system. Journal of Economic Surveys, 34(3), 631–651. https://doi.org/10.1111/joes.12374
Ball, R. (1994). What determines the behavior of stock prices? Journal of Monetary Economics, 34(2), 101–139. https://doi.org/10.1016/0304-3932(94)90047-7
Bernanke, B. S., & Blinder, A. S. (1992). The Federal funds rate and the channels of monetary transmission. American Economic Review, 82(4), 901–921. https://doi.org/10.3386/w3272
Bernanke, B. S., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4), 27–48. https://doi.org/10.1257/jep.9.4.27
Bernanke, B. S., Reinhart, V. R., & Sack, B. P. (2004). Monetary policy alternatives at the zero bound: An empirical assessment. Brookings Papers on Economic Activity, 2004(2), 1–100. https://doi.org/10.1353/eca.2005.0001
Blanchard, O. J., & Fischer, S. (1989). Lectures on macroeconomics (1st ed.). The MIT Press.
Borio, C., Furfine, C., & Lowe, P. (2001). Procyclicality of the financial system and financial stability: Issues and policy options. BIS Papers, 1, 1–57. https://doi.org/10.2139/ssrn.281956
Campbell, J. Y., Lo, A. W., & MacKinlay, A. C. (1997). The econometrics of financial markets. Princeton University Press.
Cantú, C. (2020). The implications of financial market development on financial stability, particularly in emerging markets. Emerging Markets Review, 45, 100720. https://doi.org/10.1016/j.ememar.2020.100720
Cecchetti, S. G., Kohler, M., & Upper, C. (2011). Financial crises and economic activity. Economic Inquiry, 49(4), 1040–1051. https://doi.org/10.1111/j.1465-7295.2010.00351.x
Diamond, D. W., & Rajan, R. G. (2001). Liquidity risk, liquidity creation and financial fragility: A theory of banking. Journal of Political Economy, 109(2), 287–327. https://doi.org/10.1086/319552
Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17. https://doi.org/10.3386/w1454
Gabaix, X. (2018). Behavioral macroeconomics via sparse dynamic programming. NBER Macroeconomics Annual, 32(1), 79–140. https://doi.org/10.1086/697019
Gagnon, J., Raskin, M., Remache, J., & Sack, B. (2011). The financial market effects of the Federal Reserve’s large-scale asset purchases. International Journal of Central Banking, 7(1), 3–43. https://doi.org/10.3386/w13706
Gertler, M., & Karadi, P. (2015). Monetary policy surprises, credit costs, and economic activity. American Economic Journal: Macroeconomics, 7(1), 44–76. https://doi.org/10.1257/mac.20130100
Hendershott, T., & Riordan, R. (2013). Algorithmic trading and information. Journal of Finance, 68(5), 1–33. https://doi.org/10.1111/jofi.12025
Kiyotaki, N., & Moore, J. (1997). Credit cycles. Journal of Political Economy, 105(2), 211–248. https://doi.org/10.1086/262072
Menkveld, A. J. (2013). High frequency trading and the new market makers. Journal of Financial Markets, 16(4), 712–740. https://doi.org/10.1016/j.finmar.2013.07.003
Obstfeld, M., & Rogoff, K. (2001). The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? In NBER Macroeconomics Annual 2000, Volume 15 (pp. 339-412). MIT Press. https://doi.org/10.3386/w7777
Obstfeld, M., & Taylor, A. M. (2004). Global capital markets: Integration, crisis, and growth. Journal of Monetary Economics, 51(5), 951–974. https://doi.org/10.1016/j.jmoneco.2003.09.011
Qizi, A. (2022). Increasing interest in Islamic finance. Islamic Economic Studies, 30(1), 1–20. https://doi.org/10.35632/2538-0202.1060
Rey, H. (2013). Dilemma not trilemma: The global financial cycle and monetary policy independence. NBER Working Paper Series, No. 21162. https://doi.org/10.3386/w21162
Rey, H. (2016). International channels of transmission of monetary policy and the Mundellian trilemma. In J. B. Taylor & H. Uhlig (Eds.), Handbook of Macroeconomics (Vol. 2, pp. 1873–1970). Elsevier. https://doi.org/10.1016/bs.hesmac.2016.09.002
Shiller, R. J. (2015). Irrational Exuberance. Princeton University Press. https://doi.org/10.2307/j.ctt7t2zv
Silva, T. (2020). Emerging market local currency bond markets: A review. BIS Quarterly Review, September 2020. Bank for International Settlements. https://www.bis.org/publ/qtrpdf/r_qt2009e.htm
Silva, T. (2020). The growth of local currency bond markets in emerging economies. Journal of International Money and Finance, 109, 102235. https://doi.org/10.1016/j.jimonfin.2020.102235
Svensson, L. E. O. (2009). Evaluating monetary policy. In B. M. Friedman & M. Woodford (Eds.), Handbook of Monetary Economics (Vol. 3, pp. 547–669). Elsevier. https://doi.org/10.1016/S1573-4420(08)03009-5
Woodford, M. (2005). Central bank communication and policy effectiveness. Bank of Japan Monetary and Economic Studies, 23(October), 73–112. https://www.boj.or.jp/en/research/brp/ron_2005/data/ron0503a.pdf