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Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence

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  • Michael D. Bordo
  • John Landon-Lane

Abstract

In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit with asset price booms. Using a panel of up to 18 OECD countries from 1920 to 2011 we estimate the impact that loose monetary policy, low inflation, and bank credit has on house, stock and commodity prices. We review the historical narratives on asset price booms and use a deterministic procedure to identify asset price booms for the countries in our sample. We show that “loose” monetary policy – that is having an interest rate below the target rate or having a growth rate of money above the target growth rate – does positively impact asset prices and this correspondence is heightened during periods when asset prices grew quickly and then subsequently suffered a significant correction. This result was robust across multiple asset prices and different specifications and was present even when we controlled for other alternative explanations such as low inflation or “easy” credit.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19585.

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Date of creation: Oct 2013
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Publication status: published as Michael D. Bordo & John Landon-Lane, 2013. "Does expansionary monetary policy cause asset price booms? some historical and empirical evidence," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 16(2), pages 04-52, August.
Handle: RePEc:nbr:nberwo:19585

Note: DAE ME
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Cited by:
  1. John B. Taylor, 2014. "The Role of Policy in the Great Recession and the Weak Recovery," American Economic Review, American Economic Association, vol. 104(5), pages 61-66, May.
  2. Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
  3. John Taylor, 2014. "Causes of the Financial Crisis and the Slow Recovery: A 10-Year Perspective," Discussion Papers, Stanford Institute for Economic Policy Research 13-026, Stanford Institute for Economic Policy Research.
  4. John B. Taylor, 2013. "The Effectiveness of Central Bank Independence Versus Policy Rules," Discussion Papers, Stanford Institute for Economic Policy Research 12-009, Stanford Institute for Economic Policy Research.
  5. Paul Beaudry & Dana Galizia & Franck Portier, 2014. "Reconciling Hayek's and Keynes Views of Recessions," NBER Working Papers 20101, National Bureau of Economic Research, Inc.

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