The Standard & Poor stock market composite index is examined to determine how much of the variance in returns can be explained by monetary policy. The note employs the econometric technique of generalized forecast error variance decomposition developed by Koop et al. (1996) and Pesaran and Shin (1998). Unlike the traditional orthogonalized decomposition, the generalized version is invariant to the ordering of the variables in the underlying vector autoregression. The results provide important information about the relationship between monetary policy and the stock market. Copyright 2001 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research
