Researchers have been studying the relationship between monetary policy and stock returns for years. Even so, their research methods on this topic are still changing. Cheng Jiang applies the Markov-switching dynamic bi-factor model, a new econometric model to answer this classic research question. 

Jiang finds that expansionary monetary policies (such as a decrease in the federal funds rate) follow economic recessions, but bear stock markets occur before economic recessions.

In addition, he finds that expansionary monetary policies will raise the stock return, but the stock return does not directly influence monetary policy.