| Abstract: |
This paper examines the association between monetary policy and stock market
booms and busts in the United States, United Kingdom, and Germany during the
20th century. Booms tended to arise when output growth was rapid and inflation
was low, and end within a few months of an increase in inflation and monetary
policy tightening. Latent variable VAR analysis of post-war data finds that
inflation has had a particularly strong impact on market conditions, with
disinflation shocks moving the market toward a boom and positive inflation
shocks moving the market toward a bust. We conclude that central banks can
contribute to financial market stability by minimizing unanticipated changes
in inflation. |