Abstract

http://ssrn.com/abstract=1285421
 
 

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Monetary Policy and Stock Market Boom-Bust Cycles


Lawrence J. Christiano


Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Cosmin L. Ilut


Duke University

Roberto Motto


European Central Bank (ECB)

Massimo Rostagno


European Central Bank (ECB)

October 31, 2008

ECB Working Paper No. 955

Abstract:     
We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all rise and then crash) in response to such a news shock, in a standard real business cycle model. However, a monetized version of the model which stresses sticky wages and a Taylor-rule based monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. We explore the possibility that integrating credit growth into monetary policy may result in improved performance. We discuss the robustness of our analysis to alternative specifications of the labor market, in which wage-setting frictions do not distort on going firm/worker relations.

Number of Pages in PDF File: 99

Keywords: DSGE Models, Monetary Policy, Asset price boom-busts

JEL Classification: C11, C51, E5, E13, E32

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Date posted: November 20, 2008  

Suggested Citation

Christiano, Lawrence J. and Ilut, Cosmin L. and Motto, Roberto and Rostagno, Massimo, Monetary Policy and Stock Market Boom-Bust Cycles (October 31, 2008). ECB Working Paper No. 955. Available at SSRN: http://ssrn.com/abstract=1285421

Contact Information

Lawrence J. Christiano (Contact Author)
Northwestern University ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8231 (Phone)
847-491-7001 (Fax)
Federal Reserve Bank of Cleveland
East 6th & Superior
Cleveland, OH 44101-1387
United States
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604
United States
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55480
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Cosmin L. Ilut
Duke University ( email )
100 Fuqua Drive
Durham, NC 27708-0204
United States
HOME PAGE: http://econ.duke.edu/~cli2/index.html
Roberto Motto
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
Massimo Rostagno
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)
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