Why the Fed Should Ignore the Stock Market

Bullard, James B.; Schaling, Eric

doi:10.20955/r.84.35-42

Cited by 70 publications

(66 citation statements)

References 16 publications

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“…By 1925 there were more than 1,500 finance companies operating in the United States. 56 By 1927 nearly two-thirds of new cars in the U.S. were 54 This observation is not original with us. Crick (1929, p.103) argues that installment credit did more to amplify the business cycle upswing in the U.S. because it started from a higher base and its use was more evenly spread over the population.…”

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confidence: 87%

The Great Depression as a Credit Boom Gone Wrong

2003

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The experience of the 1990s renewed economists' interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic cycles is the expansion of the 1920s and the Great Depression. In this paper we ask how well quantitative measures of the credit boom phenomenon can explain the uneven expansion of the 1920s and the slump of the 1930s. We complement this macroeconomic analysis with three sectoral studies that shed further light on the explanatory power of the credit boom interpretation: the property market, consumer durables industries, and high-tech sectors. We conclude that the credit boom view provides a useful perspective on both the boom of the 1920s and the subsequent slump. In particular, it directs attention to the role played by the structure of the financial sector and the interaction of finance and innovation. The credit boom and its ultimate impact were especially pronounced where the organization and history of the financial sector led intermediaries to compete aggressively in providing credit. And the impact on financial markets and the economy was particularly evident in countries that saw the development of new network technologies with commercial potential that in practice took considerable time to be realized. In addition, the structure and management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining the developments in credit markets that helped to set the stage for the Great Depression. JEL classification codes: E3, N2.2

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confidence: 87%

The Great Depression as a Credit Boom Gone Wrong

2003

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“…The reaction parameter is always modest, ranging between 0.01 and 0.5. Within the model framework of Rotemberg and Woodford (1999), Bullard and Schaling (2002) argue that the benefits from responding separately to the asset prices are small. Moreover, a sufficiently strong response to asset prices may lead to indeterminacy of the rational expectations equilibrium and hence, to endogenous expectations-driven fluctuations.…”

Section: The Role Of Stock Prices As Indicator Variablesmentioning

confidence: 99%

Identifying the interdependence between US monetary policy and the stock market

Bjørnland

Leitemo

2009

Journal of Monetary Economics

310

154

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999). We find great interdependence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 percent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock increasing stock prices by one percent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks.

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“…34 See, e.g., . 35 See, e.g., Bullard and Schaling (2002). 36 See, e.g., Kontonikas and Ioannidis (2005), Montagnoli (2006), andBask (2009).…”

Section: Should the Central Bank Deflate Bubbles?mentioning

confidence: 99%

Agent-based financial markets and New Keynesian macroeconomics: a synthesis

Lengnick

Wohltmann

2012

J Econ Interact Coord

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may University of Kiel University of MannheimHans-Werner Wohltmann * * University of KielNovember 4, 2010 AbstractWe combine a simple agent-based model of financial markets with a standard New Keynesian macroeconomic model via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of stock price bubbles. Even with such a simplistic comprehensive model, we can show that the behavioral foundations of the stock market exert important influence on the macroeconomy, e.g. they change the impulse-response functions of macroeconomic variables significantly. We also analyze financial market transaction taxes as well as asset price bubble deflating monetary policy, and find that both can be used to reduce volatility and distortion of the macroeconomic aggregates.JEL classification: E0, E52, G12, G18

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Why the Fed Should Ignore the Stock Market

Abstract: and thanks the Reserve Bank staff for their hospitality. The authors also thank Hui Guo, Frank Schmid, and Robert Rasche for helpful comments. Charles Hokayem provided research assistance.

Cited by 70 publications

References 16 publications

The Great Depression as a Credit Boom Gone Wrong

The Great Depression as a Credit Boom Gone Wrong

Identifying the interdependence between US monetary policy and the stock market

Agent-based financial markets and New Keynesian macroeconomics: a synthesis

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