Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms

60 Pages Posted: 4 Apr 2011 Last revised: 28 Dec 2011

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Date Written: August 2004

Abstract

This paper examines the economic environments in which past U.S. stock market booms occurred as a first step toward understanding how asset price booms come about and whether monetary policy should be used to defuse booms. We identify several episodes of sustained rapid rise in equity prices in the 19th and 20th Centuries, and then assess the growth of real output, productivity, the price level, money and credit stocks during each episode. Two booms stand out in terms of their length and rate of increase in market prices -- the booms of 1923-29 and 1994-2000. In general, we find that booms occurred in periods of rapid real growth and productivity advance, suggesting that booms are driven at least partly by fundamentals. We find no consistent relationship between inflation and stock market booms, though booms have typically occurred when money and credit growth were above average.

Suggested Citation

Bordo, Michael D. and Wheelock, David C., Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms (August 2004). NBER Working Paper No. w10704. Available at SSRN: https://ssrn.com/abstract=1801079

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

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