Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence

73 Pages Posted: 25 Oct 2013

See all articles by Michael D. Bordo

Michael D. Bordo

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

John S. Landon-Lane

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics

Date Written: October 2013

Abstract

In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit with asset price booms. Using a panel of up to 18 OECD countries from 1920 to 2011 we estimate the impact that loose monetary policy, low inflation, and bank credit has on house, stock and commodity prices. We review the historical narratives on asset price booms and use a deterministic procedure to identify asset price booms for the countries in our sample. We show that "loose" monetary policy - that is having an interest rate below the target rate or having a growth rate of money above the target growth rate - does positively impact asset prices and this correspondence is heightened during periods when asset prices grew quickly and then subsequently suffered a significant correction. This result was robust across multiple asset prices and different specifications and was present even when we controlled for other alternative explanations such as low inflation or "easy" credit.

Suggested Citation

Bordo, Michael D. and Landon-Lane, John S., Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence (October 2013). NBER Working Paper No. w19585. Available at SSRN: https://ssrn.com/abstract=2345079

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

John S. Landon-Lane

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

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