Abstract

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Monetary Policy and Stock Market Booms


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)

September 24, 2010

Economic Research Initiatives at Duke (ERID) Working Paper No. 69

Abstract:     
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.

Number of Pages in PDF File: 48

Keywords: Inflation Targeting, Sticky Prices, Sticky Wages, Stock Price Boom, DSGE Model, New Keynesian Model, News, Interest Rate Rule

JEL Classification: E42, E58

Accepted Paper Series


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Date posted: October 1, 2010 ; Last revised: August 6, 2014

Suggested Citation

Christiano, Lawrence J. and Ilut, Cosmin L. and Motto, Roberto and Rostagno, Massimo, Monetary Policy and Stock Market Booms (September 24, 2010). Economic Research Initiatives at Duke (ERID) Working Paper No. 69. Available at SSRN: http://ssrn.com/abstract=1684785

Contact Information

Lawrence J. Christiano
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 (Contact Author)
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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