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Monetary Policy and Stock Market Booms

48 Pages Posted: 1 Oct 2010 Last revised: 6 Aug 2014

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)

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2010

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.

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

JEL Classification: E42, E58

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: https://ssrn.com/abstract=1684785

Lawrence J. Christiano

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
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Federal Reserve Bank of Cleveland

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Cleveland, OH 44101-1387
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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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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 )

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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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