Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence

Abstract

In this paper we investigate the relationship between monetary policy, low inflation, and bank credit with asset price booms. Using a panel of up to 18 OECD countries from 1920 to 2011 we estimate the impact that monetary policy, low inflation, and bank credit has on house, stock and commodity prices. We review the historical narratives on asset price booms and use a deterministic procedure to identify asset price booms for the countries in our sample. We show that loose monetary policy - that is having an interest rate below the target rate or having a growth rate of money above the target growth rate - does positively impact asset prices and this correspondence is heightened during periods when asset prices grew quickly and then subsequently suffered a significant correction. This result was robust across multiple asset prices and different specifications and was present even when we controlled for other alternative explanations such as low inflation or easy credit.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.