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Monetary Policy and the New Economy. Between Supply Shock and Financial Bubble

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  • Eric Dor
  • in Durré

Abstract

This paper deals with some issues that recently arised from the puzzling evolution of Stock Markets during the nineties, in particular from the sharp increase of equity prices on the Nasdaq. We examine the hypothesis according to which such a bullish market could be explained by investors' increasingly optimistic expectations about the 'New economy' perspectives. We then analyse to what extent the evolution of financial markets may have recently affected aggregate demand in a stronger way than in the past. Using a simple aggregate model with rational expectations, we finally show how monetary policy decisions should be influenced by such changes in the behaviour of investors and consumers.

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Bibliographic Info

Article provided by De Boeck Université in its journal Recherches économiques de Louvain.

Volume (Year): 68 (2002)
Issue (Month): 1 ()
Pages: 221-237

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Handle: RePEc:cai:reldbu:rel_681_0221

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Web page: http://www.cairn.info/revue-recherches-economiques-de-louvain.htm

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  1. Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers 2223, C.E.P.R. Discussion Papers.
  2. Smets, Frank, 1997. "Financial Asset Prices and Monetary Policy: Theory and Evidence," CEPR Discussion Papers 1751, C.E.P.R. Discussion Papers.
  3. Boucekkine, Raouf & del Rio, Fernando & Licandro, Omar, 1999. "Endogenous vs Exogenously Driven Fluctuations in Vintage Capital Models," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999007, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  4. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  5. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  6. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  7. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
  8. Timothy Cogley, 1999. "Should the Fed take deliberate steps to deflate asset price bubbles?," Economic Review, Federal Reserve Bank of San Francisco, pages 42-52.
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