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Why the Fed should ignore the stock market

Author

Listed:
  • 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.

Suggested Citation

  • James B. Bullard & Eric Schaling, 2002. "Why the Fed should ignore the stock market," Review, Federal Reserve Bank of St. Louis, issue Mar., pages 35-42.
  • Handle: RePEc:fip:fedlrv:y:2002:i:mar.:p:35-42:n:v.84no.2
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    References listed on IDEAS

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    1. Michael Gort & Jeremy Greenwood & Peter Rupert, 1999. "Measuring the Rate of Technological Progress in Structures," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 207-230, January.
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