Monetary Policy and Stock Market Booms and Busts in the 20th Century
FRB of St. Louis Working Paper No. 2007-020A
57 Pages Posted: 16 May 2007
Date Written: May 2007
This paper examines the association between monetary policy and stock market booms and busts in the United States, United Kingdom, and Germany during the 20th century. Booms tended to arise when output growth was rapid and inflation was low, and end within a few months of an increase in inflation and monetary policy tightening. Latent variable VAR analysis of post-war data finds that inflation has had a particularly strong impact on market conditions, with disinflation shocks moving the market toward a boom and positive inflation shocks moving the market toward a bust. We conclude that central banks can contribute to financial market stability by minimizing unanticipated changes in inflation.
Keywords: Stock market, booms, busts, monetary policy, policy regimes
JEL Classification: E30, E52, G18, N10, N20
Suggested Citation: Suggested Citation