Monetary Policy and Stock Market Booms

Lawrence Christiano, Cosmin L. Ilut, Roberto Motto & Massimo Rostagno
Working Paper 16402
DOI 10.3386/w16402
Issue Date

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.

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

Related

Topics

Macroeconomics
Money and Interest Rates
Monetary Policy

Programs

Economic Fluctuations and Growth

More from NBER

In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.

15th Annual Feldstein Lecture, Mario Draghi, "The Next Flight of the Bumblebee: The Path to Common Fiscal Policy in the Eurozone cover slide
2023, 15th Annual Feldstein Lecture, Mario Draghi, "The Next Flight of the Bumblebee: The Path to Common Fiscal Policy in the Eurozone"
  • Lecture
Dr. Mario Draghi, who served as President of the European Central Bank and Prime Minister of Italy, presented the 2023...
2023 Methods Lectures, Jesse Shapiro and Liyang (Sophie) Sun, "Linear Panel Event Studies" Primary tabs
2023 Methods Lectures, Jesse Shapiro and Liyang (Sophie) Sun, "Linear Panel Event Studies"
  • Lecture
Overview: Linear panel event studies are increasingly used to estimate and plot causal effects of changes in policies...
2023, SI Economics of Social Security, Panel Discussion, "Long-Term Dynamics of the Employment-to-Population Ratio" Primary tabs
2023, SI Economics of Social Security, Panel Discussion, "Long-Term Dynamics of the Employment-to-Population Ratio"
  • Lecture
Supported by the Alfred P. Sloan Foundation, the National Science Foundation, and the Lynde and Harry Bradley...