Should the Fed React to the Stock Market?

1. Define the following terms used in the reading:
   1. "leaning against the bubble"
   2. "wealth effect"
   3. "bubble shocks"
   4. price-earnings ratio
   5. Taylor rule

2. Through what channels can changes in asset prices affect the economy?

3. Why do Bernanke and Gertler argue that the central bank should respond only to goal variables and not to stock prices?

4. What economic problems in the early 2000s can be seen as consequences of the 1990s stock market bubble?

5. What are the chief arguments against "leaning against the bubble?" How do supporters of this policy approach rebut these arguments?

6. What empirical evidence suggests that stock prices have influenced monetary policymakers during Alan Greenspan's term as Fed chairman?

Source: "Should the Fed React to the Stock Market?" Kevin J. Lansing, Federal Reserve Bank of San FranciscoFRBSF Economic Letter, No. 2003-34, November 14, 2003.