The Impact of Monetary Policy on Investor Sentiment

Abstract

This paper examines the relationship between monetary policy and investor sentiment across conventional and unconventional monetary policy regimes. During conventional times, we find that a surprise increase in the fed funds rate leads to a large drop in investor sentiment that reverses after several months. Similarly, when the fed funds rate is at its zero lower bound, research results indicate that contractionary unconventional monetary policy shocks also have a large and adverse impact on investor mood. Together, our findings highlight the importance of both conventional and unconventional monetary policy in the determination of investor sentiment.