Monetary Policy and Stock Market Booms

Lawrence Christiano, Cosmin L. Ilut, Roberto Motto & Massimo Rostagno

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

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