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

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  • Carmen M. Reinhart
  • Vincent Reinhart

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16815.

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Date of creation: Feb 2011
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Handle: RePEc:nbr:nberwo:16815

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  2. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the Fall," NBER Working Papers 16334, National Bureau of Economic Research, Inc.
  3. Reinhart, Vincent & Simin, Timothy, 1997. "The market reaction to federal reserve policy action from 1989 to 1992," Journal of Economics and Business, Elsevier, vol. 49(2), pages 149-168.
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Cited by:
  1. £ukasz Goczek, 2011. "Federal policy responses to the 2007-2009 credit crunch in the US," Equilibrium, Uniwersytet Mikolaja Kopernika, vol. 6, pages 27-42.
  2. Reinhart, Carmen & Reinhart, Vincent, 2011. "The Capital Inflow “Problem” Revisited," MPRA Paper 29537, University Library of Munich, Germany.
  3. Jean-Paul Pollin, 2010. "Commentaire : Articuler les explications pour comprendre la bulle immobilière," Économie et Statistique, Programme National Persée, vol. 438(1), pages 173-179.
  4. Kenneth Kuttner, 2012. "Low Interest Rates and Housing Bubbles: Still No Smoking Gun," Department of Economics Working Papers 2012-01, Department of Economics, Williams College.
  5. Jeroen Hessel & Jolanda Peeters, 2011. "Housing bubbles, the leverage cycle and the role of central banking," DNB Occasional Studies 905, Netherlands Central Bank, Research Department.
  6. Kenneth Kuttner, 2011. "Monetary Policy and Asset Price Volatility: Should We Refill the Bernanke-Gertler Prescription?," Department of Economics Working Papers 2011-04, Department of Economics, Williams College, revised Jun 2011.

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