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Monetary Policy and the New Economy : Between Supply Shock and Financial Bubble*

Published online by Cambridge University Press:  17 August 2016

Eric Dor  and
Alain Durré
Eric Dor
Affiliation:
Université catholique de Lille, IESEG, Labores-CNRS et IRES Université catholique de Louvain
Alain Durré
Affiliation:
IRES Université catholique de Louvain, and Labores-CNRS
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Summary

This paper deals with some issues that recently arised from the puzzling evolution of Stock Markets during the nineties, in particular from the sharp increase of equity prices on the Nasdaq. We examine the hypothesis according to which such a bullish market could be explained by investors’ increasingly optimistic expectations about the ‘New economy’ perspectives. We then analyse to what extent the evolution of financial markets may have recently affected aggregate demand in a stronger way than in the past. Using a simple aggregate model with rational expectations, we finally show how monetary policy decisions should be influenced by such changes in the behaviour of investors and consumers.

Résumé

Résumé

Cet article traite des questions récemment soulevées par les fortes fluctuations des marchés financiers dans les années 90 et, en particulier, de la forte hausse des valeurs sur le Nasdaq. Nous examinons l’hypothèse selon laquelle une telle bulle financière est due aux anticipations de plus en plus optimistes des agents sur les perspectives de la Nouvelle Economie. Nous analysons ensuite le fait de savoir si l’effet de la demande agrégée sur l’évolution des marchés financiers durant cette période a été plus important que par le passé. En utilisant un simple modèle agrégé avec anticipations rationelles, nous montrons comment les décisions de politique monétaire devraient prendre en compte les changements importants dans le comportement des investisseurs et des consommateurs.

Keywords

Monetary PolicyInflation and Output gap targetingNew Economy and Financial ExuberanceE430E310E520Politique monétaireStabilisation de l’output gap et de l’inflationNouvelle Economie et Exubérance financiereE430E310E520
Type
III. Finance
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 68 , Special Issue 1-2: The New Economy: Implications and Viability , 2002 , pp. 221 - 237
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2002 

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Footnotes

*

We thank two anonymous referees for very useful comments and suggestions. This paper was presented at the congress ‘The New Economy : Implications and Viability”, Université de Metz (France), April 27-28, 2001. All remaining errors are ours.

**

Université catholique de Lille : Faculté Libre des Sciences économiques, Institut d’Economie Scientifique et de Gestion (IESEG), Labores-CNRS and Université catholique de Louvain : Département des Sciences économiques, Institut de Recherches économiques et Sociales (IRES-UCL).

***

Université catholique de Louvain : Département des Sciences économiques, Institut de Recherches économiques et Sociales (IRES-UCL). Durré’s research is supported by the Belgian government (Pôles d’Attraction inter-universitaires PAI P4/01).

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