Monetary Policy and Stock Market Boom-Bust Cycles

By L. Christiano, Cosmin L. Ilut, Roberto Motto, M. Rostagno. Social Science Research Network, 2008

360 citations recorded by the source corpus.

We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all rise 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 Taylorrule based monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. We explore the possibility that integrating credit growth into monetary policy may result in improved performance. We discuss the robustness of our analysis to alternative specifications of the labor market, in which wage-setting frictions do not distort on going firm/worker relations. JEL Classification: C11, C51, E5, E13, E32

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/5065eefe468a36c6bb5e07f9132d88b663adaeea

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Citations in the corpus

DSGE Models for Monetary Policy Analysis (2010, neutral): “For further discussion of these issues, see Christiano et al. (2008).”
Anticipated Growth and Business Cycles in Matching Models (2009, neutral): “adjustment costs. Christiano, Motto, and Rostagno (2006) assume that nominal wages”
Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination (2016, neutral): “Christiano et al. (1999) and Christiano et al. (2005) use a structural VAR method to identify the impulse responses of macroeconomic variables to monetary shocks.”
The Long Slump (2011, neutral): “The simplest answer—embodied in Krugman (1998) and Christiano et al. (2009)—is that the quantity transacted is the amount demanded.”
Unemployment Fluctuations with Staggered Nash Wage Bargaining (2006, background): “Finally, loglinearizing the difference equation for the hiring rate (12) and aggregating economywide yields: b̄ x = E hκaba0 − κw b̄ w + b Λ ¡s, s0¢+ βb̄ x0i , (50)”
Code and data files for "Oil Price Shocks and the Optimality of Monetary Policy" (2010, methodology): “The theoretical model combines a medium-scale Dynamic Stochastic General Equilibrium (henceforth DSGE) model with a version of the oil demand model by Finn (2000), where oil is necessary for capital use.”
Financial Factors in Economic Fluctuations (2010, neutral): “[33] Christiano, Lawrence J.”
Credit Frictions and Optimal Monetary Policy (2008, background): “More recent contributions include Christiano, Motto and Rostagno (2003, 2010), Christiano et al. (2008), Gertler, Gilchrist and Natalucci (2007), and Iacoviello (2005).”
(How) do the ECB and the Fed React to Financial Market Uncertainty? The Taylor Rule in Times of Crisis (2010, methodology): “In Table 2 we present the results of equation (8) for the Fed, i.e. the Taylor rule without interest rate smoothing based on a sample period which excludes the subprime crisis.”
Monetary and Macroprudential Policy Rules in a Model with House Price Booms (2009, background): “Y C t (i) = A C t L C t (i); for all i 2 [0; 1]; and (15) Y D t (i) = L D t (i); for all i 2 [0; 1]: (16)”
Fiscal Foresight: Analytics and Econometrics (2008, background): “Non-invertibility is likely to present itself in several areas of research that are now receiving attention: news about future technological improvement [Beaudry and Portier (2006), Christiano, Ilut, Motto, and Rostagno (2007) , Jaimovich and Rebelo (2008)]; foresight about large government spendin”
Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach* (2010, background): “Christiano, Ilut, Motto and Rostagno (2008) and Schmitt-Grohe and Uribe (2009)”