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Stock Prices and Monetary Policy. CEPS Working Document No. 304, September 2008

De Grauwe, Paul. (2008) Stock Prices and Monetary Policy. CEPS Working Document No. 304, September 2008. [Working Paper] (Unpublished)

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    Abstract

    The question of whether central banks should target stock prices so as to prevent bubbles and crashes from occurring has been hotly debated. This paper analyses this question using a behavioural macroeconomic model. This model generates bubbles and crashes. It analyses how ‘leaning against the wind’ strategies, which aim to reduce the volatility of stock prices, can help in reducing volatility of output and inflation. We find that such policies can be effective in reducing macroeconomic volatility, thereby improving the trade-off between output and inflation variability. The strength of this result, however, depends on the degree of credibility of the inflation-targeting regime. In the absence of such credibility, policies aiming at stabilising stock prices do not stabilise output and inflation.

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    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    EU policies and themes > Policies & related activities > economic and financial affairs > Single Market > capital, goods, services, workers
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Working Documents
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 11 Nov 2009
    Page Range: p. 22
    Last Modified: 15 Feb 2011 18:15
    URI: http://aei.pitt.edu/id/eprint/11658

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