Does expansionary monetary policy cause asset price booms? some historical and empirical evidence

Abstract

This paper develops a method to identify asset price booms, focused on housing, stock markets and commodities, with data from 18 OECD countries from 1920 onwards. It checks whether boom episodes can be linked to various measures of monetary policy, namely deviations from the Taylor rule and a money growth rate. The results show that a "lax" monetary policy—in which the interest rate is below the target or the growth rate of the money base exceeds the target rate—does have a positive impact on asset prices, and that this correspondence is exacerbated in periods of sharp price increases, and then suffer a significant correction, this result being robust. Another finding is that low inflation and, to a lesser extent, "easy" credit, are also associated with asset price increases".