Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully rational expectations have difficulty...

Previous estimates of the monetary policy response to stock market fluctuations in the United States are found to be sizable and significant once the simultaneous interdependence between stock prices and interest rates is properly taken into account. We show that this result is not confirmed...