Document Type

Book Chapter

Publication Date


Publication Title

Asset Price Bubbles: Implications For Monetary And Regulatory Policy



Publisher Name

Elsevier Science


This paper argues that the Fed was not stock market bubble-neutral during the last several years. This nonneutrality implies two options: first, the Fed has used monetary policies to prevent the building of the stock market bubble or, second, the Fed has contributed to its development and subsequent deflation. We supply representative quotes from the FOMC transcripts to establish that the Fed has paid significant attention to the valuation of the stock market. These quotes confirm that the stock market’s valuation was an important variable in the Fed’s decision-making and its conduct of monetary policy. We also conduct econometric modeling, by extending the Taylor rule and using data for the 1987-2000 period, to argue that the Fed, perhaps unintentionally, has contributed to the stock market’s overvaluation and subsequent decline.


Author Posting © Elsevier Science, 2001.This is the author's version of the work. It is posted here by permission of Elsevier for personal use, not for redistribution.

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.