From crisis to crisis: The roles of interest rate and inflation in shaping stock returns in selected advanced economies

This study investigates how monetary policy rate adjustments and inflation trends influence stock market performance in the United States (US), the European Union (EU), the United Kingdom (UK), and Japan, covering the Global Financial Crisis (GFC) and the COVID-19 pandemic. Using wavelet techniques, the analysis captures time- and frequency-specific relationships that move beyond static, single-economy approaches. Results show that interest rate cuts stabilised stock returns during the GFC, partically in the US and UK, while post-pandemic dynamics were dominated by inflation shocks that amplified volatility in all economies excpet for Japan, where inflation effects remained weak at medium-horizon. The EU's delayed tightening prolonged uncertainty and exhibited weaker short-horizon transmission, whereas Japan's ultra-loose stance muted the effects of rate hikes, and inflation remained a relatively mild and statistically weak influence even post-2021. The findings highlight a structural shift from interest rate dominace to inflation to inflation-driven volatility in all economies except Japan, with important implications for central banks and investors.