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

See all articles by Michael D. Bordo

Michael D. Bordo

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

Michael Dueker

Russell Investments

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Date Written: May 2007

Abstract

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

Bordo, Michael D. and Dueker, Michael and Wheelock, David C., Monetary Policy and Stock Market Booms and Busts in the 20th Century (May 2007). FRB of St. Louis Working Paper No. 2007-020A. Available at SSRN: https://ssrn.com/abstract=986404 or http://dx.doi.org/10.2139/ssrn.986404

Michael D. Bordo

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

Michael Dueker (Contact Author)

Russell Investments ( email )

909 A Street
Tacoma, WA 98402
United States

HOME PAGE: http://sites.google.com/site/michaeldueker

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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