Effectiveness of Monetary Policy: Market Reactions and Volatility Interactions

Abstract

The central bank policy instruments have become less effective in an environment where economies are integrated with sophisticated financial products. We argue that economic stability is a function of interactions between financial and commodity markets. We utilize MGARCH models to identify volatility comovements between these markets in the United States since 2000. Our results suggest that financial markets have strong impacts on prices and volatility in commodity markets which could be due to intertemporal capital mobility. Thus, understanding commodity markets is inseparable from understanding financial market activities, and must now be included in an economic equation to achieve an effective policy.

Citation

Lee, T.K. and Zyren, J. (2009), "Effectiveness of Monetary Policy: Market Reactions and Volatility Interactions", Choi, J.J. and Papaioannou, M.G. (Ed.) Credit, Currency, or Derivatives: Instruments of Global Financial Stability Or crisis? (International Finance Review, Vol. 10), Emerald Group Publishing Limited, Leeds, pp. 355-387. https://doi.org/10.1108/S1569-3767(2009)0000010015