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Stock Prices, Output and the Monetary Regime

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  • Robert Flood
  • Nancy Marion

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Abstract

Should monetary policy react to stock prices? The answer depends on whether stock prices are good predictors of future economic activity. Using long annual time-series data for the G-7 countries, data going back over 150 years for some countries, we find that stock prices do not systematically predict output growth regardless of the monetary regime in effect. We also find no evidence of a nonlinear relationship between stock prices and output except during the gold standard, when stock price booms and busts had some predictive power for output growth volatility. Copyright Springer Science + Business Media, LLC 2006

Suggested Citation

  • Robert Flood & Nancy Marion, 2006. "Stock Prices, Output and the Monetary Regime," Open Economies Review, Springer, vol. 17(2), pages 147-173, April.
  • Handle: RePEc:kap:openec:v:17:y:2006:i:2:p:147-173 DOI: 10.1007/s11079-006-6808-3
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    References listed on IDEAS

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    1. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
    2. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
    3. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, pages 788-829.
    4. Cecchetti, Stephen G. & Kashyap, Anil K, 1996. "International cycles," European Economic Review, Elsevier, vol. 40(2), pages 331-360, February.
    5. Timothy Cogley, 1999. "Should the Fed take deliberate steps to deflate asset price bubbles?," Economic Review, Federal Reserve Bank of San Francisco, pages 42-52.
    6. Barry Eichengreen & David Leblang, 2003. "Capital account liberalization and growth: was Mr. Mahathir right?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 205-224.
    7. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
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