A number of economists have expressed concern that the stock market is overvalued. Some have compared the situation with the 1920s, warning that the market may be headed for a similar collapse. Indeed, some suggest that lax monetary policy contributed to the Great Crash and have argued that current monetary policy is also dangerously lax. The chapter argues that The Economist has misinterpreted the lessons of the Great Crash. The implication is that monetary policy was far more restrictive than a purely domestic perspective might suggest. In 1928 there was a synchronized, global contraction of monetary policy, which occurred primarily because the Fed was concerned about stock prices. In retrospect, it seems that the lesson of the Great Crash is more about the difficulty of identifying speculative bubbles and the risks associated with aggressive actions conditioned on noisy observations.
ASJC Scopus subject areas
- Social Sciences(all)