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Speculative excess and the Federal Reserve's response

Author

Listed:
  • John H. Huston
  • Roger W. Spencer

Abstract

Purpose - The purpose of this paper is to develop a single variable indicative of the state of market speculation; to determine whether the Federal Reserve has attempted to quell speculation when it has been most rampant and whether such attempts were successful. Design/methodology/approach - The paper examine the literature on market “bubbles” and the Federal Reserve's treatment of them; to determine a single variable reflective of market speculation via principle components integration; to examine the Federal Reserve's interaction with market speculation by estimating a vector autoregression version of the Taylor rule. Findings - It is possible to construct a single variable representative of market speculation, termed the index of speculative excess that correlates well with standard views of market excess; the Federal Reserve did attempt to retard market speculation during the three major bull markets of the past century; monetary policy did little to inhibit market speculation. Originality/value - Highly original in the construction of a single variable reflective of market speculation; joins the ongoing debate as to the extent of Federal Reserve concern with speculative activity and the Fed's poor record of accomplishment in this area.

Suggested Citation

  • John H. Huston & Roger W. Spencer, 2009. "Speculative excess and the Federal Reserve's response," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 26(1), pages 46-61, March.
    • Handle: RePEc:eme:sefpps:v:26:y:2009:i:1:p:46-61
    DOI: 10.1108/10867370910946324
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    References listed on IDEAS

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