Can Sending Charcoal in the Snow Come True? ——Monetary Policy and its Dynamic Impact on Stock Market Liquidity : Empirical Evidence from China

This paper employs a time-varying parameter vector autoregressive model to investigate the short-, medium-, and long-term effects of monetary policy on stock market liquidity and examine how these effects differ in the bull and bear markets of China. Our results demonstrate that changes in both stock market liquidity and funding liquidity can lead to a liquidity spiral, which provides evidence for the significance of liquidity expectations in China’s transmission mechanism. Furthermore, we find that an increase in returns could promote or harm stock market liquidity in different periods. Therefore, central banks must first manage expectations effectively to prevent liquidity spirals