Monetary policy and asset prices: a look back at past U.S. stock market booms

This article examines the economic environments in which past U.S. stock market booms occurred as a first step toward understanding how asset price booms come about and whether monetary policy should be used to defuse booms. The authors identify several episodes of sustained rapid rises in equity prices in the 19th and 20th centuries, and then assess the growth of real output, productivity, the price level, and money and credit stocks during each episode. Two booms stand out in terms of their length and rate of increase in market prices?the booms of 1923-29 and 1994-2000. In general, the authors find that booms occurred in periods of rapid real growth and productivity advancement, suggesting that booms are driven at least partly by fundamentals. They find no consistent relationship between inflation and stock market booms, though booms have typically occurred when money and credit growth were above average.