Author(s)

Xiaoqiu Liu, Yangqing Xiao

Corresponding Author

Yangqing Xiao

Abstract

This paper studies the influence of investor sentiment on monetary policy transmission from the perspective of behavioral finance. Two VAR models are established in this experiment, while the factor of investor sentiment is contained in only one model. The dynamic relationships between variables in these two models are compared to determine whether the effect of monetary policy on macro economy can be influenced by investor sentiment. The empirical results show that investor sentiment can exacerbate price and output fluctuations caused by monetary policy. The explanatory power of monetary policy increases when investor sentiment is taken into consideration.

Keywords

Monetary Policy, Investor Sentiment, Impulse Response Analysis, Variance Decomposition