How do stock price volatility affect monetary policy Essay - 1

How do stock price volatility affect monetary policy - Essay Example Therefore they have an effect on interest rates, inflation rates and money supply. These variables are controlled by monetary policy made by the central banks of countries or federal reserves and the policy determination is therefore depended on the stock prices. This paper discusses how the movements in stock prices affect determination of monetary policy. Monetary policy is the process by which the central bank or a federal reserve regulates the money supply and interest rates in order to achieve a major economic goal. On the other hand the stock market is considered as the country’s economic strength and development since it’s a non-physical facility of economic transactions. In any particular country, the economy strongly reacts to stock prices movement and in most cases economic recession is preceded by crash in stock markets. There is a very important relationship between the central banks of countries and stock markets. This makes the monetary authorities to make monetary decisions and policies by closely monitoring the stock market volatility. This ensures the authorities maintain a macroeconomic balance. According to Rigobon and sack 2001, volatility of stock prices significantly impact macroeconomics hence an important factor in determining the monetary policy. As mentioned earlier, this paper discusses the how stock price volatility affects monetary policy. This is addressed by using simple models of data from the international monetary fund in the quarterly series as at December 2010. The data used in the research is UK data ranging from 1990 first quarter to 2010 fourth quarter. The variables contained in this data set are the real UK GDP (RGDP), the consumer price index (CPI) and the interest rates set by the Bank of England The international monetary fund has 188 member countries. These countries work to foster global monetary cooperation, financial stability security, reduce poverty around the world, and promote sustainable