Monetary Policy Transmission and Equity Cycles in Emerging Markets
“Understanding the direct causal transmission mechanisms between central bank policy rates, banking liquidity, and stock market indices.”
Strategic Implication: Understanding the direct causal transmission mechanisms between central bank policy rates, banking liquidity, and stock market indices.
In economies with developing capital markets, the transmission mechanism from central bank open market operations to secondary equity trading is exceptionally direct and rapid.
When interbank rates climb and credit-deposit ratios tighten, institutional liquidity recedes from capital market investments into risk-free fixed deposits. Conversely, liquidity easing triggers swift capital reallocation into dividend-yielding securities.
Investors who track credit-to-deposit trends, interbank lending rates, and treasury bill yields gain vital predictive foresight on equity market liquidity direction.