Stock Markets and Central Bankers: The Economic Consequences of Alan Greenspan

24 Pages Posted: 30 Jan 2002

See all articles by Stephen H. Wright

Stephen H. Wright

Birkbeck College, University of London

Andrew R.W. Smithers

Smithers & Co.


There is a near-consensus that central bankers should focus their attention on the control of inflation, and should accordingly not pay attention to movements in stock markets. This view is reinforced by the continuing influence of the Efficient Market Hypothesis (EMH), that maintains that financial markets correctly price firms at all times. We assert that this general view is incorrect. There are strong reasons, both in principle and in practice, to doubt the applicability of the EMH to the valuation of the stock market as a whole. Indicators of stock market value, such as q, show the market to have been severely overvalued at the end of the twentieth century. Previous episodes of overvaluation have been succeeded, both in the USA and Japan, by severe recessions. Such recessions raise the risk of central banks losing control of inflation, due to liquidity traps; they also impose costs, in terms of output and inflation, that central bankers should take into account. Finally, central bankers already do in any case take these into account, but asymmetrically: only when markets fall, not when they rise.

Keywords: Stock Markets, Tobin's q, Monetary Policy, Alan Greenspan

JEL Classification: E50, E58, E30, G100, G140

Suggested Citation

Wright, Stephen H. and Smithers, Andrew R.W., Stock Markets and Central Bankers: The Economic Consequences of Alan Greenspan. Available at SSRN: or

Stephen H. Wright (Contact Author)

Birkbeck College, University of London ( email )

Malet St
London, WC1 E7HX
United Kingdom

Andrew R.W. Smithers

Smithers & Co. ( email )

20 St Dunstan's Hill
United Kingdom

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