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Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms

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  • Michael D. Bordo
  • David C. Wheelock

Abstract

This paper examines the economic environments in which past U.S. stock market booms occurred as a first step toward understanding how asset price booms come about and whether monetary policy should be used to defuse booms. We identify several episodes of sustained rapid rise in equity prices in the 19th and 20th Centuries, and then assess the growth of real output, productivity, the price level, money and credit stocks during each episode. Two booms stand out in terms of their length and rate of increase in market prices -- the booms of 1923-29 and 1994-2000. In general, we find that booms occurred in periods of rapid real growth and productivity advance, suggesting that booms are driven at least partly by fundamentals. We find no consistent relationship between inflation and stock market booms, though booms have typically occurred when money and credit growth were above average.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10704.

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Date of creation: Aug 2004
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Publication status: published as Bordo, Michael D. and David C. Wheelock. "Monetary Policy And Asset Prices: A Look Back At Past U.S. Stock Market Booms," FRB St. Louis - Economic Review, 2004, v86(6,Nov/Dec), 19-44.
Handle: RePEc:nbr:nberwo:10704

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