How did the Fed react to the 1990s stock market bubble? Evidence from an extended Taylor rule

M. D. Hayford and Anastasios Malliaris
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M. D. Hayford: Economics, School of Business Administration, Loyola University, Chicago, 820 N. Michigan Avenue, Chicago, IL 60611, USA

Chapter 14 in Economic Uncertainty, Instabilities and Asset Bubbles:Selected Essays, 2005, pp 223-232 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractHow did the Federal Reserve Bank react to the stock market bubble of the late 1990s? At a Symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming on August 30, 2002, Chairman Alan Greenspan remarked that economists do not currently have a way to measure a stock market bubble convincingly. He also argued that in the absence of such a measure, it was difficult for the Fed to justify, with some degree of certainty, a preemptive tightening that would likely be necessary to neutralize such a bubble. This paper extends the Taylor Rule methodology to include three measures of stock market overvaluation and confirms Greenspan's statement that the Fed did not neutralize the bubble. However, the extended Taylor Rule methodology also shows that the Fed, perhaps unintentionally, by keeping the Fed funds rate below those suggested by the Taylor Rule, may have actually contributed to the growth of the bubble.

Keywords: Asymptotic Economic Growth; Inflation; Interest Rates; Asset Pricing; Equity Markets; Foreign Currency; Monetary Policy; Crash (search for similar items in EconPapers)
JEL-codes: C58 C73 E31 E37 E43 G12 G17 (search for similar items in EconPapers)
Date: 2005
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