TAILIEUCHUNG - Monetary Policy and Stock Market Boom-Bust Cycles∗

Our analysis also contributes to assessing market e¢ ciency in a way that it investigates how the markets price in information about banks and how this process may di§er across di§erent types of banks. To that end, we apply a large panel of 53 EU banks using a stationary vector autoregressive (VAR) sys- tem that allows us to focus on such Örm-level e§ects. A further contribution to the literature is provided by the fact that we also want to analyse whether large banksístock prices could be a§ected by di§erent factors than small banksí stock prices. This could have important implications from the point of view of Önancial stability. | Monetary Policy and Stock Market Boom-Bust Cycles Lawrence Christiano Roberto Motto and Massimo Rostagno November 2 2006 Abstract We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle a period in which stock prices consumption investment and employment all rise and then crash in response to such a news shock in a standard real business cycle model. However a monetized version of the model which stresses sticky wages and an inflation-targeting monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. We explore the possibility that integrating credit growth into monetary policy may result in improved performance. This paper expresses the views of the authors and not necessarily those of the European Central Bank. We are especially grateful for the comments of Andrew Levin. We have also benefited from the comments of Paul Beaudry and of Giovanni Lombardo. Northwestern University and National Bureau of Economic Research European Central Bank European Central Bank 1. Introduction Inflation has receded from center stage as a major problem and attention has shifted to other concerns. One concern that has received increased attention is volatility in asset markets. A look at the data reveals the reason. Figure 1 displays monthly observations on the S P500 converted into real terms using the CPI for the period 1870 to early 2006. Note the recent dramatic boom and bust. Two other pronounced boom-bust episodes are evident the one that begins in the early 1920s and busts near the start of the Great Depression and another one that begins in the mid 1950s and busts in the 1970s. These observations raise several questions. What are the basic forces driving the boom-bust episodes Are they driven by economic fundamentals or are they bubbles The boom phase is associated with strong output employment consumption and

• Đầu tư Chứng khoán
• Procedural Techniques
• Risks and Complications
• Contrast Related Complications
• Cardiac Catetherization
• Diagnosis and Management
• Contrast Induced Nephropathy
• Skin Biopsy
• Uniqueness of CADASIL
• Research Applications
• rapidly developing