Theoretical and Empirical Analysis of the Relationship Between Monetary Policy and Stock Market Indices

This paper focuses on investigating the relationship between monetary policy and stock market indices based on system theoretical analysis and empirical testing using vector autoregressive models. Our study reveals peculiarities of the relationship between monetary and stock market indicators in developed, successfully developing and moderately developing countries with high political and economic risks. First, we described theoretical aspects of the monetary policy mechanism that influences stock market development. Second, we systematized key economic variables and mathematical models that are widely used in the literature for similar studies. Third, we empirically demonstrated that stock market has a significant impact on monetary indicators in most countries, whereas monetary policy with focus on stock market stimulation is only effective in developed economies. We concluded that the stock market in developing countries demonstrates weak reaction to short-term changes in monetary policy of central banks and mainly depends on their long-term relationship.