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Monetary Policy and Stock Market Booms

Lawrence Christiano (), Cosmin Ilut, Roberto Motto and Massimo Rostagno ()
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Roberto Motto: European Central Bank

No 2011-005, Working Papers from Banco Central de Reserva del Perú

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.

Keywords: inflation targeting; sticky prices; sticky wages; stock price boom; DSGE model; New Keynesian model; news; interest rate rule (search for similar items in EconPapers)
JEL-codes: E42 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
Date: 2011-03
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Related works:
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
Working Paper: Monetary Policy and Stock Market Booms (2010) Downloads
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