Inflation, Monetary Policy and Stock Market Conditions

Michael David Bordo (), Michael J. Dueker () and David Wheelock ()

No 14019, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the association between inflation, monetary policy and U.S. stock market conditions during the second half of the 20th century. We estimate a latent variable VAR to examine how macroeconomic and policy shocks affect the condition of the stock market. Further, we examine the contribution of various shocks to market conditions during particular episodes and find evidence that inflation and interest rate shocks had particularly strong impacts on market conditions in the postwar era. Disinflation shocks promoted market booms and inflation shocks contributed to busts. We conclude that central banks can contribute to financial market stability by minimizing unanticipated changes in inflation.

JEL-codes: E31 E52 G12 N12 N22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
Date: 2008-05
Note: ME EFG AP
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