Monetary Policy and Stock Market Booms

Lawrence J Christiano, Cosmin L. Ilut, Roberto Motto, Massimo Rostagno

Research output: Working paper

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.
Original languageEnglish (US)
Pages85-145
Number of pages61
StatePublished - Sep 2010

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