Speculative excess and the Federal Reserve's response
Abstract
Purpose
The purpose of this paper is to develop a single variable indicative of the state of market speculation; to determine whether the Federal Reserve has attempted to quell speculation when it has been most rampant and whether such attempts were successful.
Design/methodology/approach
The paper examine the literature on market “bubbles” and the Federal Reserve's treatment of them; to determine a single variable reflective of market speculation via principle components integration; to examine the Federal Reserve's interaction with market speculation by estimating a vector autoregression version of the Taylor rule.
Findings
It is possible to construct a single variable representative of market speculation, termed the index of speculative excess that correlates well with standard views of market excess; the Federal Reserve did attempt to retard market speculation during the three major bull markets of the past century; monetary policy did little to inhibit market speculation.
Originality/value
Highly original in the construction of a single variable reflective of market speculation; joins the ongoing debate as to the extent of Federal Reserve concern with speculative activity and the Fed's poor record of accomplishment in this area.
Keywords
Citation
Huston, J.H. and Spencer, R.W. (2009), "Speculative excess and the Federal Reserve's response", Studies in Economics and Finance, Vol. 26 No. 1, pp. 46-61. https://doi.org/10.1108/10867370910946324
Publisher
:Emerald Group Publishing Limited
Copyright © 2009, Emerald Group Publishing Limited