Stock Market Speculation and Federal Reserve Policy: Lessons from the Great Bull Market

Abstract

A debate about the appropriate role of monetary policy during periods of high stock prices has accompanied the spectacular rise of US equity returns during the late 1990s. Some economists argue that the Federal Reserve should attempt to deflate share values, while others recommend nonintervention. This paper addresses this issue by examining the Fed’s reaction to the “Great Bull Market” of the 1920s. The findings suggest that because uncertainty about policies toward speculation may depress real activity, officials should only employ activist measures to attain clearly defined goals like price stability