Causal Relationship between Stock Prices and Interest Rates: The Case of EU Countries

Taking into consideration the growth and EU accession of some countries in the last decade and the fact that monetary policy monitors the economic stability, and implicitly the financial stability, it is important to analyze how the monetary policy transmission mechanism is transmitted and embedded on stock markets. This article investigates the short- and long-term linkages between stock markets and interest rates in EU countries from January 2000 to February 2012. The analysis is carried out using co-integration tests and Granger causality test. The results reveal the existence of long and short term relationship between stock prices and interest rates. Moreover, on the long-run the comovement between interest rates and stock prices becomes stronger during crisis period, when compared with entire period.