The responses of stock returns and stock market volatility vary before and after May 1997, when the Bank of England gained independence, which suggests that a change in the monetary policymaking process tends to affect the responses of stock markets.
The research also uncovers the fact that the UK stock market fails to hedge against inflation in short and medium-term, but provides a good hedge against inflation in long-term.
This thesis contains three main parts: (i) monetary policy and stock returns, examining the impact of monetary policy announcements on stock returns and stock market volatility under different monetary policy regimes, especially before and after the independence of the Bank of England in 1997; (ii) inflation and stock returns, investigating the issues whether common stocks are a hedge against inflation in short, medium and long-term and under different inflationary economies and regimes; (iii) corporate financing mix and inflation exposure, testing how corporate financing mix affects the exposure of common stocks to inflation.
The results suggest that monetary policy announcements negatively affect stock returns and significantly impact stock market volatility.
Specifically, the first tranche focuses on the relationship between money, asset markets and uncertainty, while the second addresses the transmission of changes in the money stock to prices and output.
The starting premise is that changes in the money stock affect goods and asset markets and the research predominantly uses time series-based econometric methods, informed by economic theory and using US data, to investigate money’s links to both.
IRF analysis also shows that there is a positive shock of global food price on the domestic prices which lasts for longer periods.
Hence, the policy makers are recommended to take into account food prices in computing core inflation which is used for monetary policy in Sri Lanka.
After a short introduction to standard and inflationary cosmology, we present our research findings.
On the one hand, we show that focusing on universality properties of inflation can yield surprisingly stringent bounds on its dynamics.