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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• Lawrence J. 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.

• Lawrence Christiano & Cosmin L. Ilut & Roberto Motto & Massimo Rostagno, 2010. " Monetary Policy and Stock Market Booms ," NBER Working Papers 16402, National Bureau of Economic Research, Inc.
• Cosmin L. Ilut & Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2010. " Monetary Policy and Stock Market Booms ," Working Papers 10-69, Duke University, Department of Economics.
• Lawrence J. Christiano & Cosmin Ilut & Roberto Motto & Massimo Rostagno, 2010. " Monetary policy and stock market booms ," FRB Atlanta CQER Working Paper 2010-08, Federal Reserve Bank of Atlanta.

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More about this item

Keywords

JEL classification:

• E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
• E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

NEP fields

• NEP-CBA-2011-05-24 (Central Banking)
• NEP-DGE-2011-05-24 (Dynamic General Equilibrium)
• NEP-FDG-2011-05-24 (Financial Development and Growth)
• NEP-MAC-2011-05-24 (Macroeconomics)
• NEP-MON-2011-05-24 (Monetary Economics)

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