Monetary Policy and Stock Market Booms
Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices.
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Copy CitationLawrence Christiano, Cosmin L. Ilut, Roberto Motto, and Massimo Rostagno, "Monetary Policy and Stock Market Booms," NBER Working Paper 16402 (2010), https://doi.org/10.3386/w16402.
Published Versions
Lawrence Christiano & Cosmin Ilut & Roberto Motto & Massimo Rostagno, 2010. "Monetary policy and stock market booms," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 85-145. citation courtesy of 
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