A systematic review of the monetary policy and herd behavior

Abstract

The article focuses on analyzing developments in the academic literature regarding the relationship between monetary policy and herd behavior in the stock market. The main research method used in this article is a systematic review of the literature, including methods of synthesis and bibliographic analysis. Accordingly, the bibliographic method is employed to organise and analyze the standard deviation associated with behavioral economics research. The research offers scholarly publications that include the term “monetary policy and herd behavior” from Dimensions database between the middle of 2014 to the beginning of 2023. The results show that there are two main research trends on the relationship between monetary policy and herd behavior, which are based on theory and market effects. Accordingly, the theoretical background to explain this interaction includes the micro-foundation of economics, behavioral macroeconomics, and the mediation of the stock market cycle. However, like most other micro-factors, crowd psychology has not been studied and appreciated in terms of its influence on economic policy, even though they are purely a crucial components causing asset bubbles are beyond the control and adjustment of monetary policy. Therefore, future studies should have a specific definition, as well as a proper assessment of the role of the crowd in the ability to make investment decisions as well as the market's risk tolerance in order to have specific recommendations for monetary policy.