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Pride Goes Before a Fall: Federal Reserve Policy and Asset Markets

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  • Carmen M. Reinhart
  • Vincent Reinhart

Abstract

Considerable debate rages about whether Federal Reserve policy was too lax in the early part of the 2000s, thereby fueling the home-price bubble that was the proximate cause of the global financial crisis. We present evidence that the view that modest alterations to monetary policy have vast consequences is inconsistent with theory and not supported by evidence. We take a close look at the responses of asset markets to changes in the short-term policy interest rate since the founding of the Fed in 1914. Changes in the federal funds rate have no systematic effect on either long-term interest rates or housing prices over nearly a century. Indeed, since the mid-1990s the policy rate had a negative relationship with long-term interest rates. This is consistent with a global view of capital markets where massive cross-border flows shape the availability of domestic credit and asset prices. The evidence casts doubts on arguments that a moderately different monetary policy path might have mattered.

Suggested Citation

  • Carmen M. Reinhart & Vincent Reinhart, 2011. "Pride Goes Before a Fall: Federal Reserve Policy and Asset Markets," NBER Working Papers 16815, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16815
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    2. Alan Greenspan, 2010. "The Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 201-261.
    3. Carmen M. Reinhart & Vincent Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
    4. Reinhart, Vincent & Simin, Timothy, 1997. "The market reaction to federal reserve policy action from 1989 to 1992," Journal of Economics and Business, Elsevier, vol. 49(2), pages 149-168.
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    Citations

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    Cited by:

    1. Kenneth N. Kuttner, 2013. "Low Interest Rates and Housing Bubbles: Still No Smoking Gun," World Scientific Book Chapters,in: The Role of Central Banks in Financial Stability How Has It Changed?, chapter 8, pages 159-185 World Scientific Publishing Co. Pte. Ltd..
    2. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2015. "Betting the house," Journal of International Economics, Elsevier, vol. 96(S1), pages 2-18.
      • Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2014. "Betting the House," NBER Chapters,in: NBER International Seminar on Macroeconomics 2014, pages 2-18 National Bureau of Economic Research, Inc.
    3. Kenneth Kuttner, 2011. "Monetary Policy and Asset Price Volatility: Should We Refill the Bernanke-Gertler Prescription?," Department of Economics Working Papers 2011-04, Department of Economics, Williams College, revised Jun 2011.
    4. Adam S. Posen, 2011. "Monetary Policy, Bubbles, and the Knowledge Problem," Cato Journal, Cato Journal, Cato Institute, vol. 31(3), pages 461-471, Fall.
    5. Lukasz Goczek, 2011. "Federal Policy Responses To The 2007-2009 Credit Crunch In The Us," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 6(3), pages 27-42, September.
    6. Reinhart, Carmen & Reinhart, Vincent, 2011. "The Capital Inflow “Problem” Revisited," MPRA Paper 29537, University Library of Munich, Germany.
    7. Jeroen Hessel & Jolanda Peeters, 2011. "Housing bubbles, the leverage cycle and the role of central banking," DNB Occasional Studies 905, Netherlands Central Bank, Research Department.
    8. Jean-Paul Pollin, 2010. "Commentaire : Articuler les explications pour comprendre la bulle immobilière," Économie et Statistique, Programme National Persée, vol. 438(1), pages 173-179.
    9. Bradley Jones, 2015. "Asset Bubbles; Re-thinking Policy for the Age of Asset Management," IMF Working Papers 15/27, International Monetary Fund.
    10. Gerald P. O'Driscoll, 2011. "Money, Prices, and Bubbles," Cato Journal, Cato Journal, Cato Institute, vol. 31(3), pages 441-459, Fall.

    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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