Studies argue that monetary policy has an impact on bonds and stock liquidity only during the financial crisis. Others argue that monetary policy has an impact on the liquidity during a high economic volatility period relative to a stable period. These studies are not comprehensive enough to provide a big picture of the relationship between monetary policy and these two financial markets. I am speculating that in addition to the financial crisis, economic recession alters the effect of monetary policy on the bond and stock liquidity. So, how we do model this? How we do disentangle the effects of the financial/economic crisis?
You can use a dummy variable to indicate the period or years where you have a financial/economic crisis in your time series.
can refer to
1. Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach
by Stephen D. Williamson
Article Common determinants of bond and stock market liquidity: the ...
it might be good for you to take look at the bellow links of articles:
http://www.nyu.edu/econ/user/jovanovi/jovanovicfinal1.pdf
https://www.diva-portal.org/smash/get/diva2:1331144/FULLTEXT01.pdf
https://www.grin.com/document/313683#:~:text=During%20times%20of%20expansionary%20monetary,and%20Subrahmanyam%2C%202005%2C%20p.&text=They%20suggest%20that%20money%20flows,stock%20and%20bond%20market%20liquidity.
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr164.pdf
best wishes,
You may engage in wavelet transform analysis and assess the nature of co-movement where you can determine evidence of interdependence or financial contagion
Through monetary policy, the Central Bank can reduce or expand the money supply in the economy. An expansionary monetary policy increases the money supply, reduces the cost of borrowing, increases the demand for funds, and enhances liquidity in bond, stock and other asset classes in capital markets. A contractionary policy leads to the opposite. Hence, monetary policy affects the liquidity of financial assets (bonds and stocks). The effect is more pronounced during periods of market dislocation (financial crisis) when the correlation between various asset classes and that between various capital markets around the world increases (see Bruno Solnik's work).
Let us start with asking the following question; did the financial crises spread to the real economy? If did not, then you need not worry about separating the effects of the financial/economic crisis.
If it did, I think a look at lending cuts by banks could be a proxy for the effect of the financial crisis while interest rates would serve as a proxy for the economic recession, other Central Banks’ instruments like financial easing, buying individual corporate bonds and lending directly to businesses are worth examining as well.
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