Financial booms and busts is a recurring theme in history, from the tulip mania in the 17th century to the dot-com rage and beyond. The financial crisis of 2008 revealed a housing market bubble that took a decade to restore. In this mini-case, we look at the link between asset price booms and busts and the monetary policy of the Federal Reserve.
An enduring challenge for the Fed is how to time and size changes in monetary policy. Historically, it has proven very difficult to predict precisely its effects.
While the stated goal of the Fed is in terms of inflation and employment, monetary loosening and tightening seems to have a much more pronounced effect on financial markets.
Do you think the Fed creates asset bubbles? Have a try!
Did you get the right answer?
Don’t hesitate to ask questions, leave comments or simply suggest other related cases we could build to help you go even deeper into your understanding of the monetary policy!
If you are interested in central banks’ monetary policy and the different type of dilemmas they are confronted to, have a look at the case about “Norges Bank and the Oil Price Collapse“!
