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Monetary Policy and Stock Market Booms

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

No 16402, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E42 E58 (search for similar items in EconPapers)
Date: 2010-09
Note: EFG
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Published as Lawrence Christiano & Cosmin Ilut & Roberto Motto & Massimo Rostagno, 2010. "Monetary policy and stock market booms," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 85-145.

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Working Paper: Monetary Policy and Stock Market Booms (2011) Downloads
Journal Article: Monetary policy and stock market booms (2010) Downloads
Working Paper: Monetary Policy and Stock Market Booms (2010) Downloads
Working Paper: Monetary policy and stock market booms (2010) Downloads
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