Should Central Banks Target Stock Prices?

CEPS Policy Brief No. 171

3 Pages Posted: 27 Jan 2009

See all articles by Paul De Grauwe

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Date Written: September 23, 2008

Abstract

This paper, which draws on a longer, more analytical Working Document by the same author (No. 304/September 2008), explores the question of whether central banks should target stock prices so as to prevent bubbles and crashes from occurring. It analyses how 'leaning against the wind' strategies, which aim to reduce the volatility of stock prices, can help in reducing volatility of output and inflation. Its finds, however, that a critical element in the success in such a strategy is the degree of credibility of the inflation-targeting regime. In the absence of such credibility, policies aiming at stabilising stock prices do not stabilise output and inflation.

Keywords: Macroeconomic Policy, Economic Policy

Suggested Citation

De Grauwe, Paul and De Grauwe, Paul, Should Central Banks Target Stock Prices? (September 23, 2008). CEPS Policy Brief No. 171, Available at SSRN: https://ssrn.com/abstract=1333548 or http://dx.doi.org/10.2139/ssrn.1333548

Paul De Grauwe (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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