Speculative excess and the Federal Reserve's response

John H. Huston and Roger W. Spencer

Studies in Economics and Finance, 2009, vol. 26, issue 1, 46-61

Abstract: Purpose - The purpose of this paper is to develop a single variable indicative of the state of market speculation; to determine whether the Federal Reserve has attempted to quell speculation when it has been most rampant and whether such attempts were successful. Design/methodology/approach - The paper examine the literature on market “bubbles” and the Federal Reserve's treatment of them; to determine a single variable reflective of market speculation via principle components integration; to examine the Federal Reserve's interaction with market speculation by estimating a vector autoregression version of the Taylor rule. Findings - It is possible to construct a single variable representative of market speculation, termed the index of speculative excess that correlates well with standard views of market excess; the Federal Reserve did attempt to retard market speculation during the three major bull markets of the past century; monetary policy did little to inhibit market speculation. Originality/value - Highly original in the construction of a single variable reflective of market speculation; joins the ongoing debate as to the extent of Federal Reserve concern with speculative activity and the Fed's poor record of accomplishment in this area.

Keywords: Stock markets; Monetary policy; United States of America (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:v:26:y:2009:i:1:p:46-61

DOI: 10.1108/10867370910946324

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