Journal Article

Why the Fed should ignore the stock market

Abstract: James B. Bullard and Eric Schaling study a simple, small dynamic economy which a policymaker is attempting to control with a Taylor-type monetary policy rule. The authors wish to understand the macroeconomic consequences of the policymaker?s decision to include the level of equity prices in the rule. They show that such a policy can be counterproductive because it can interfere directly with the policymaker?s ability to minimize inflation and output variability. In extreme cases, a policy of targeting equity prices can lead to an indeterminate rational expectations equilibrium and hence a more unpredictable form of volatility than would be achieved by maintaining a rule without asset prices included. They thus provide an important and novel theoretical reason why policymakers may wish to ignore equity market developments when setting monetary policy.

Keywords: Stock market; Monetary policy; Federal Open Market Committee;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2002

Volume: 84

Issue: Mar.

Pages: 35-42