Monetary Policy and Stock Market Booms

Cosmin Ilut, Lawrence Christiano, Roberto Motto and Massimo Rostagno ()

No 10-69, Working Papers from Duke University, Department of Economics

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.

Keywords: inflation targeting; sticky prices; sticky wages; stock price boom; DSGE model; New Keynesian model; news; interest rate rule. (search for similar items in EconPapers)
JEL-codes: E42 E58 (search for similar items in EconPapers)
Pages: 48
Date: 2010
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Citations: View citations in EconPapers (184)

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Related works:
Working Paper: Monetary Policy and Stock Market Booms (2011)
Journal Article: Monetary policy and stock market booms (2010)
Working Paper: Monetary policy and stock market booms (2010)
Working Paper: Monetary Policy and Stock Market Booms (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:10-69

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