ABSTRACT

The literature on financial economics appears relatively quiescent in regards to analysing the links between financial volatility and real economic activity. This chapter explores the issue of stock market volatility by examining the relationship between stock market prices and fundamentals. It explores the issue of monetary volatility and its effects on financial and non-financial activity, by providing an overview of monetary theory as well as examining the empirical evidence relating to the operation of monetary policy in Australia. Volatility plays a fundamentally important role in determining stock market efficiency. The linkages to the real economy, although occasionally implied, are not explicit in terms of the effects increased financial volatility may have on real economic activity prior to the actual financial crises. I. Grabel acknowledges, however, the importance of measuring volatility as a first step towards an empirical assessment of the effects of stock market volatility in developing economies.