Working Paper: NBER ID: w8992
Authors: Frederic S. Mishkin; Eugene N. White
Abstract: This paper examines fifteen historical episodes of stock market crashes and their aftermath in the United States over the last one hundred years. Our basic conclusion from studying these episodes is that financial instability is the key problem facing monetary policy makers and not stock market crashes, even if they reflect the possible bursting of a bubble. With a focus on financial stability rather than the stock market, the response of central banks to stock market fluctuations is more likely to be optimal and maintain support for the independence of the central bank.
Keywords: Stock Market Crashes; Monetary Policy; Financial Stability
JEL Codes: E58; E44; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock market crashes (G01) | financial instability (F65) |
| financial instability (F65) | reduced consumer spending (D12) |
| financial instability (F65) | reduced investment (G31) |
| stock market crashes (G01) | adverse selection in credit markets (D82) |
| adverse selection in credit markets (D82) | contraction of lending (G21) |
| contraction of lending (G21) | reduced economic activity (F69) |
| stock market crashes (G01) | moral hazard problems (D82) |
| moral hazard problems (D82) | constrained lending (G21) |
| financial instability (F65) | increased interest rate spreads (E43) |
| increased interest rate spreads (E43) | effects on low-quality borrowers (F65) |