Latest Publictions

2022 Mar/30
Impacts of tightening monetary policy on stock market in Korea Issue Papers 22-04 PDF
Jang, Bosung
Other Publications

No other publications.

As inflation spreads across a wide range of sectors, it seems quite difficult to mitigate the current inflationary pressure. Accordingly, Bank of Korea is expected to respond more strongly to inflation, leading to growing interest in the impacts on the stock market. Against this backdrop, this study identifies monetary policy shocks in terms of interest rates and M2 separately, and investigates how such shocks would affect stock prices.
In this article, impulse responses of stock prices are estimated for aggregate indices—the KOSPI and the KOSDAQ index, and industry portfolios. The results indicate that contractionary M2 shocks, rather than interest rate shocks, tend to have more significant effects on stock prices. In particular, falls in stock prices are pronounced in the KOSPI and IT, industrial materials, raw materials and consumer discretionary sectors. Furthermore, while stock prices exhibit a strong correlation with industrial production among macroeconomic and financial indicators, industries having stronger correlations with production are more susceptible to monetary policy shocks. This implies that business cycles serve as an important channel through which monetary policy influences stock prices, whose responses could vary depending on sensitivity to business cycles.
One additional takeaway is that, despite the contractionary impacts, stock prices recover in a short period of time. In other words, domestic monetary policy could have a short-term effect on stock prices to some extent, but it hardly would change their trends. Therefore, a desirable approach is to pay attention to developments of the real economy and manage related risks, rather than overreacting to monetary policy.