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Why the Fed should ignore the stock market

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Author Info

  • James B. Bullard
  • Eric Schaling

Abstract

James B. Bullard and Eric Schaling study a simple, small dynamic economy which a policymaker is attempting to control with a Taylor-type monetary policy rule. The authors wish to understand the macroeconomic consequences of the policymaker’s decision to include the level of equity prices in the rule. They show that such a policy can be counterproductive because it can interfere directly with the policymaker’s ability to minimize inflation and output variability. In extreme cases, a policy of targeting equity prices can lead to an indeterminate rational expectations equilibrium and hence a more unpredictable form of volatility than would be achieved by maintaining a rule without asset prices included. They thus provide an important and novel theoretical reason why policymakers may wish to ignore equity market developments when setting monetary policy.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2002)
Issue (Month): Mar. ()
Pages: 35-42

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Handle: RePEc:fip:fedlrv:y:2002:i:mar.:p:35-42:n:v.84no.2

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Related research

Keywords: Monetary policy ; Stock market ; Federal Open Market Committee;

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