DP8090 U.S. Monetary Shocks and Global Stock Prices

Author(s): Luc Laeven, Hui Tong
Publication Date: November 2010
Keyword(s): asset allocation, asset prices, financial constraints, monetary policy, monetary transmission
JEL(s): E44, F36, G14, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8090

This paper studies how U.S. monetary policy affects global stock prices. We find that global stock prices respond strongly to changes in U.S. interest rate policy, with stock prices increasing (decreasing) following unexpected monetary loosening (tightening). This impact is more pronounced for sectors that depend on external financing, and for countries that are more integrated with the global financial market. These findings suggest that financial frictions play an important role in the transmission of monetary policy, and that U.S. monetary policy influences global capital allocation.