WP 2011-05: Monetary Policy and Stock Market Booms
WP 2011-05: Monetary Policy and Stock Market Booms
WP 2011-05: Monetary Policy and Stock Market Booms
N°
WP 2011-05
Title
Monetary Policy and Stock Market Booms
Author(s)
Lawrence Christiano, Cosmin Ilut, Roberto Motto and Massimo Rostagno
Language
English
Date
2011/03/31
Abstract
Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices.