Can Money Turn Bad News into Good News?
Published: June 2020
Over the past two decades, monetary policy has been used in unprecedented ways for macroeconomic and financial sector stabilization. This article argues that monetary policy, especially the unconventional measures (quantitative easing) implemented in the post-2008 period, has likely contributed to major financial imbalances (asset bubbles). Markets started responding to bad news about the economy’s fundamentals by stock price increases as if it was good news: in anticipation that loose monetary measures (injections of liquidity) would continue. This has important policy implications for the debate whether/how monetary and macroprudential policies should address asset price developments, very relevant during the current COVID-19 pandemic.