Pride Goes Before a Fall: Federal Reserve Policy and Asset Markets

Carmen Reinhart and Vincent Reinhart

No 16815, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Considerable debate rages about whether Federal Reserve policy was too lax in the early part of the 2000s, thereby fueling the home-price bubble that was the proximate cause of the global financial crisis. We present evidence that the view that modest alterations to monetary policy have vast consequences is inconsistent with theory and not supported by evidence. We take a close look at the responses of asset markets to changes in the short-term policy interest rate since the founding of the Fed in 1914. Changes in the federal funds rate have no systematic effect on either long-term interest rates or housing prices over nearly a century. Indeed, since the mid-1990s the policy rate had a negative relationship with long-term interest rates. This is consistent with a global view of capital markets where massive cross-border flows shape the availability of domestic credit and asset prices. The evidence casts doubts on arguments that a moderately different monetary policy path might have mattered.

JEL-codes: E40 E43 E52 (search for similar items in EconPapers)
Date: 2011-02
Note: IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published as Carmen M. Reinhart and Vincent R. Reinhart, 2011. "Limits of Monetary Policy in Theory and Practice," Cato Journal, Cato Journal, Cato Institute, vol. 31(3), pages 427-439, Fall.

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Journal Article: Limits of Monetary Policy in Theory and Practice (2011)
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