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

In: Macroeconomic and Financial Stability: challenges for Monetary Policy

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  • Michael D. Bordo

    (Rutgers University and National Bureau of Economic Research)

  • John Landon-Lane

    (Rutgers University)

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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Suggested Citation

  • Michael D. Bordo & John Landon-Lane, 2014. "Does Expansionary Monetary Policy Cause Asset Price Booms? Some Historical and Empirical Evidence," Central Banking, Analysis, and Economic Policies Book Series, in: Sofía Bauducco & Lawrence Christiano & Claudio Raddatz (ed.),Macroeconomic and Financial Stability: challenges for Monetary Policy, edition 1, volume 19, chapter 3, pages 61-116, Central Bank of Chile.
    • Handle: RePEc:chb:bcchsb:v19c03pp61-116
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    JEL classification:

    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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