Monetary policy and its impact on the stock market performance

part I

Abstract

The present literature review is aimed at encouraging the discussion on the incidence of monetary policy (changes in money supply) in market returns. This topic is relevant for the academic and practitioner, and it has been widely studied internationally given its implications for economic growth, in the firms' profits and investment portfolio setting. However, it is none very scattered theme in Peru. We have found a group of researchers that supports the existence of a direct relation money supply-equity returns, other group defends an indirect relation, standing out two transmission mechanisms that lead to opposite results. Regarding to different market reactions, the defenders of Efficient Market Hypothesis (EMH) support that the market reaction depends on an unexpected component or “surprise”, while the opponents to EMH support the market reacts to an expected and an unexpected component. Contrary opinions about the time horizon were also found regarding to the effects of money supply on equity market returns. Thus, some investigators found effects of monetary policy in the short run, but not in the long-run given money neutrality. Other investigators found effects both in the short and long-run. Finally, we conclude it would be necessary to deepen the investigation for Peruvian case.