Data Management

Monetary Policy And Stock Market Boom-Bust Cycles

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Executive Summary

The authors explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. They find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all raise 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 a Taylor-rule based monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. They explore the possibility that integrating credit growth into monetary policy may result in improved performance.

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