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Monetary Policy and Stock Market Booms

Author

Listed:
  • Christiano, Lawrence

    (Northwestern University
    National Bureau of Economic Research)

  • Ilut, Cosmin

    (Duke University)

  • Motto, Roberto

    (European Central Bank)

  • Rostagno, Massimo

    (European Central Bank)

Abstract

Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices.

Suggested Citation

  • Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2011. "Monetary Policy and Stock Market Booms," Working Papers 2011-005, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2011-005
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    inflation targeting; sticky prices; sticky wages; stock price boom; DSGE model; New Keynesian model; news; interest rate rule;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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