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St Louis Fed Paper

St Louis Fed Paper

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Research Division
Federal Reserve Bank of St. Louis
Working Paper Series
Monetary Policy and Stock Market Booms and Busts in the20
th
Century
Michael D. Bordo
 
Michael J. DuekerandDavid C. Wheelock 
Working Paper 2007-020Ahttp://research.stlouisfed.org/wp/2007/2007-020.pdf May 2007FEDERAL RESERVE BANK OF ST. LOUISResearch DivisionP.O. Box 442St. Louis, MO 63166
 ______________________________________________________________________________________ The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors.Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulatediscussion and critical comment. References in publications to Federal Reserve Bank of St. Louis WorkingPapers (other than an acknowledgment that the writer has had access to unpublished material) should becleared with the author or authors.
 
Monetary Policy and Stock Market Booms and Busts in the 20
th
Century
Michael D. Bordo*Michael J. Dueker**David C. Wheelock**This draft: 10 May 2007Keywords: Stock market, booms, busts, monetary policy, policy regimesJEL codes: E300, E520, G180, N100, N200* Department of Economics, Rutgers University and NBER. Bordo@fas-econ.rutgers.edu** Research Division, Federal Reserve Bank of St. Louis. Dueker@stls.frb.org andWheelock@stls.frb.orgA prior version of this paper was presented at the Bank of England on 23 November 2006 inthe
Second Economic History Panel: Past, Present and Policy
, sponsored by the CEPR andInstitut d’Etudes Politiques de Paris. The authors thank Isabel Schnabel, Geoffrey Wood andother Panel participants for their comments, and Daniel McDonald, Christopher Martinek and Joshua Ulrich for research assistance. The views expressed in this paper are notnecessarily official positions of the Federal Reserve Bank of St. Louis or the Federal ReserveSystem.
 
 AbstractThis paper examines the association between monetary policy and stock marketbooms and busts in the United States, United Kingdom, and Germany during the 20
th
 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 policytightening. Latent variable VAR analysis of post-war data finds that inflation has hada particularly strong impact on market conditions, with disinflation shocks movingthe market toward a boom and positive inflation shocks moving the market toward abust. We conclude that central banks can contribute to financial market stability byminimizing unanticipated changes in inflation.

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