How Monetary Policy Can Influence the Stock Market Bubbles - Coursework Example

the monetary policies have a definite influence on the extraordinary stock market movements including bubbles and crashes. This paper examines the relationship that exists between the monetary policies and the stock market bubbles and concludes that the monetary policies can be varied to have very little control on the stock market movements, as monetary policies like change in the interest rates would be slow in acting on the bubble price movements. However such change in the policy may restrict the influence of the financial instability on the economy that immediately follows the bubble. This paper concludes that the central banks should adopt a standard monetary policy or bubble policy depending on the circumstances and the extent of the macroeconomic consequences of the stock bubble price movements. In the process of the study of the impact of the monetary policies on the stock market bubbles the paper also details some of the historic bubbles and crashes.

This chapter intends to provide an overview of the topic under study by explaining the central theme of the research and also the broad objectives of the study.

1.1 Monetary Policies and Stock Market Bubbles – an Overview

Expanded spells of rapidly appreciating equity, housing, and other assets prices in any country since the twentieth century has brought the impact of monetary policies on the asset market prices to the fore and to the attention of the economists to analyze the phenomenon. The analysis includes the response of the asset market booms as a result of the changed monetary policies. It is the argument from some of the economists that the nature of the financial markets tends to be volatile inherently and that the market prices often go tangentially to fundamentals. Hence they argue that it is possible for the policymakers can improve the welfare activities of the economy by adopting measures to deflate the asset price booms, especially under circumstances where the sudden declines in the asset market prices will have the effect of depressing the economic activity to the advantage of the country. There are other economists who believe that the financial markets are efficient in processing the information provided to them.