Why policymakers might care about stock market bubbles.

From: Economic Commentary (Cleveland) | Date: May 15, 2005| Author: Gomme, Paul | Copyright information

This Commentary makes a case for Fed action in the event of a stock market bubble. Because stock market prices serve as a signal to business managers to invest, bubbles can mislead managers into investing when it is not profitable. The overinvestment, which becomes apparent after the bubble bursts, can lead to a period of low investment, which can cause a recession. Policymakers may wish to step in to end a bubble before stock prices get too far out of line relative to their fundamentals. <...

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