The Role of Share Prices on Monetary Policy: The Case of OECD Countries

The recovery in asset prices during 2000's accompanied by quick growth and the recession caused by global financial crisis increased the interest in asset prices' role on macroeconomic fluctuations and hence monetary policy. In the relevant literature, it is seen that the studies analyzing the response of the monetary policies to the asset prices focus mostly on policy rules of the industrialized countries. In addition, most of the financial crises throughout the world happened in the developing economies that were open to international capital flows. The main focus of this article is to analyze the response of monetary policy to share price movements for the purpose of differentiating the developed and developing countries. Within the scope of this study, the effect of share price changes, market capitalization and interaction on short-term interest rates was researched for OECD countries for the period of 2000-2019 by means of System-GMM method. The results showed that the effect of share prices on short-term interest rates in the developed countries with high market capitalization was higher than the effect of those in the developing countries with asset lower market capitalization. The study also demonstrated that the effect of inflation deficit on short-term interest rate was positive and significant while unemployment had negative and significant effect on short-term interest rate.