Are financial markets less responsive to monetary policy shocks at the zero lower bound?

- We study the time-varying effect of monetary policy shocks on financial markets.
- The corporate bond market is highly responsive to monetary policy shocks at the zero lower bound.
- The long-term Treasury bond market is highly sensitive to monetary policy shocks throughout 1990-2012.
- The short-term Treasury bond market is severely constrained by the zero lower bound.
- The stock market is less responsive to monetary policy shocks from 2008 to 2010.

This paper investigates the time-varying effect of monetary policy shocks on financial markets. We show that the corporate bond market is highly responsive to monetary policy shocks throughout 2000-2012, implying a high pass-through of policy-induced movements in Treasury yields to private yields even during the zero lower bound period. While the long-term Treasury bond market is highly sensitive to monetary policy shocks throughout almost the entire sample, the short-term Treasury bond market is severely constrained by the zero lower bound. The stock market is less responsive from 2008 to 2010, but the responsiveness bounces back rapidly in 2011.