The Time Varying Effect of Monetary Policy on Stock Returns

We study the time varying effects of monetary policy on stock returns in order to capture changes over time on this transmission channel. We find that a one-percentage point surprise increase on the federal funds rate decreases the one-day stock return by 1.33% during the period 1989 to 2000 and by 7.47% during the period 2001 to 2007, i.e., over five times more. The effect is not statistically significant for most of the 1990s, but it is during the 2000s. These differences are not apparent in the bond market, suggesting an explanation focused on stock market operation