TY  - JOUR
AU  - Reinhart,Carmen M.
AU  - Reinhart,Vincent
TI  - Pride Goes Before a Fall: Federal Reserve Policy and Asset Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16815
PY  - 2011
Y2  - February 2011
UR  - http://www.nber.org/papers/w16815
L1  - http://www.nber.org/papers/w16815.pdf
N1  - Author contact info:
Carmen M. Reinhart
Kennedy School of Government
Harvard University
79 JFK Street
Cambridge, MA 02138
Tel:  617 496 8643
E-Mail: carmen_reinhart@harvard.edu

Vincent Reinhart
Chief US Economist and Co-head of Economic Researc
Morgan Stanley
New York, NY
E-Mail: vincent.reinhart@morganstanley.com
AB  - Considerable debate rages about whether Federal Reserve policy was too lax in the early part of the 2000s, thereby fueling the home-price bubble that was the proximate cause of the global financial crisis.  We present evidence that the view that modest alterations to monetary policy have vast consequences is inconsistent with theory and not supported by evidence.  We take a close look at the responses of asset markets to changes in the short-term policy interest rate since the founding of the Fed in 1914.  Changes in the federal funds rate have no systematic effect on either long-term interest rates or housing prices over nearly a century.  Indeed, since the mid-1990s the policy rate had a negative relationship with long-term interest rates.  This is consistent with a global view of capital markets where massive cross-border flows shape the availability of domestic credit and asset prices.  The evidence casts doubts on arguments that a moderately different monetary policy path might have mattered.
ER  -