[{"data":1,"prerenderedAt":-1},["ShallowReactive",2],{"doc-seo-324274-105":3,"detail-sidebar-cat-0-en-105":81,"doc-detail-324274-en":130},{"code":4,"msg":5,"data":6},0,"ok",{"site_id":7,"language":8,"slug":9,"title":10,"keywords":11,"description":12,"schema_data":13,"social_meta":74,"head_meta":76,"extra_data":78,"updated_unix":80},105,"en","why-policymakers-might-care-about-stock-market-bubbles","Why Policymakers Might Care about Stock Market Bubbles","","Analyzes how stock market bubbles may affect the broader macroeconomy and why policy makers could still care even when the stock market–to–macroeconomy link is loose. First considers wealth effects on consumption and finds them likely too small to explain recession dynamics. Then develops Tobin’s q investment channel, where stock prices signal investment opportunities, allowing bubbles to mislead managers into overinvestment, followed by a rapid investment decline that can contribute to recession.",{"@graph":14,"@context":73},[15,34,56],{"@type":16,"itemListElement":17},"BreadcrumbList",[18,23,27,31],{"item":19,"name":20,"@type":21,"position":22},"https://docshare.wps.com","Home","ListItem",1,{"item":24,"name":25,"@type":21,"position":26},"https://docshare.wps.com/document/","Document",2,{"item":28,"name":29,"@type":21,"position":30},"https://docshare.wps.com/document/research-report/","Research & Report",3,{"item":32,"name":10,"@type":21,"position":33},"https://docshare.wps.com/document/why-policymakers-might-care-about-stock-market-bubbles/324274/",4,{"url":32,"name":10,"@type":35,"image":36,"author":41,"headline":10,"publisher":44,"fileFormat":47,"inLanguage":8,"description":12,"dateModified":48,"datePublished":49,"encodingFormat":47,"isAccessibleForFree":50,"interactionStatistic":51},"DigitalDocument",{"url":37,"@type":38,"width":39,"height":40},"https://docshare.wps.com/thumbnails/why-policymakers-might-care-about-stock-market-bubbles/324274.png","ImageObject",300,407,{"name":42,"@type":43},"Quinn","Person",{"url":19,"name":45,"@type":46},"DocShare","Organization","application/pdf","2026-11-06","2026-09-21",true,{"@type":52,"interactionType":53,"userInteractionCount":55},"InteractionCounter",{"@type":54},"ViewAction",9,{"@type":57,"mainEntity":58},"FAQPage",[59,65,69],{"name":60,"@type":61,"acceptedAnswer":62},"Why might policymakers care about stock market bubbles even if the linkage to the macroeconomy is weak?","Question",{"text":63,"@type":64},"Because bubbles can be associated with recessions through channels that are not fully understood, and policy makers may want to intervene before prices diverge too far from fundamentals.","Answer",{"name":66,"@type":61,"acceptedAnswer":67},"How do wealth effects from stock price declines influence consumption?",{"text":68,"@type":64},"When individuals holding stocks see prices fall, they tend to feel poorer, reduce consumption, and therefore weaken one component of aggregate demand.",{"name":70,"@type":61,"acceptedAnswer":71},"What is the Tobin's q channel and how can a bubble affect investment?",{"text":72,"@type":64},"Tobin’s q compares market value of new investment goods to their replacement cost; when q is high, managers may invest. If bubbles inflate prices, q can signal investment that turns unprofitable after the crash, leading to reduced investment and potential recession.","https://schema.org",{"og:url":32,"og:type":75,"og:title":10,"og:site_name":45,"og:description":12},"article",{"robots":77,"canonical":32},"index,follow",{"doc_id":79,"site_id":7},324274,1790962327,{"code":4,"msg":82,"data":83},"success",[84,88,92,96,101,106,111,115,119,122,126],{"id":22,"doc_module":4,"doc_module_name":25,"category_name":85,"show_sort_weight":86,"slug":87},"Story & Novel",90,"story-novel",{"id":26,"doc_module":4,"doc_module_name":25,"category_name":89,"show_sort_weight":90,"slug":91},"Literature",80,"literature",{"id":33,"doc_module":4,"doc_module_name":25,"category_name":93,"show_sort_weight":94,"slug":95},"Exam",70,"exam",{"id":97,"doc_module":4,"doc_module_name":25,"category_name":98,"show_sort_weight":99,"slug":100},5,"Comic",60,"comic",{"id":102,"doc_module":4,"doc_module_name":25,"category_name":103,"show_sort_weight":104,"slug":105},6,"Technology",50,"technology",{"id":107,"doc_module":4,"doc_module_name":25,"category_name":108,"show_sort_weight":109,"slug":110},7,"Healthcare",40,"healthcare",{"id":112,"doc_module":4,"doc_module_name":25,"category_name":29,"show_sort_weight":113,"slug":114},8,30,"research-report",{"id":55,"doc_module":4,"doc_module_name":25,"category_name":116,"show_sort_weight":117,"slug":118},"Religion & 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effects on the macro-economy more generally.After all,oneach side of astock market transaction isa buyer and a seller;the sale of stock byone individual corresponds to the trans-fer ofownership of a small pice of afirm to another individual.Followingsuch a transaction,the firm can continueto produce the same goods and servicessince all the employees still work for thefirm,the firm still owns the same plantand equipment,and the particular waysofutilizing these inputs are still known  \nBut the stock market's ups and downscan have very real,ifnot direct,effiectson the macroeconomy.Stock marketbubblesare a case in point.Theinevitable crash that follows a bubblehas the potential to cause recessionshe Great Depression being the worst-case example of that connection to date.The mere possibility of repeating anepisode so destructive warrants policy-makers'interest in the behavior of thestock market,even though the linkbetween the stock market and themacroeconomy may not be well under-stood.Indeed,there is continuingdebate within the economics professionover the exact causes of the GreatDepression,as well as the factors thatled to its severity and duration.Weshould also keep in mind that the linkbetween the stock market and themacroeconomy is not very tight.AsPaul Samuelson quipped,the stock mar-ket has predicted nine of the last fiverecessions.Perhaps the lack of a tightconnection between the stock marketand the macroeconomy is a positivedevelopment,particularly if we thinkthat policymakers have managed to  \n# Why Policymakers Might Care aboutStock Market Bubbles\n\ninsulate the macroeconomy somewhatfrom stock market fluctuations.If there isn't much of a link between thestock market and the supply side of theeconomy (the ability of the conomy toproduce goods and services),then per-haps there is one between the stock mar-ket and the demand side(the influenceson demand for goods and services).Twolikely candidates present themselves:consumption and investment.The nextsection briefly examines the consump-tion channel and finds that it simply isn'tbig enough.We then examine the morepromising channcl of investment.Weconsider a particular theory ofnvest-ment(known to economists as Tobin'sq),but the crux of the argument is thatstock market prices serve as a signal tofirms'managers to buy new investmentgoods.We willsee that a stock marketcrash can very quickly lead to a reduc-tion in investment,and so a recession.Further,we will see that such invest-ment-triggered recessions may belong-lived  \n## ■ Wealth Effects\n\nOne reason that fluctuations in stockprices may affiect the macroeconomy isthat individuals who hold stocks,eitherdirectly or indirectly (for example,through mutual funds or pension plans).feel poorer when the stock market falls.This wealth effect causes pcople to cutback on their consumption,a majorcomponent ofaggregate demand.  \nHow big might these wealth effects be?Consider what happened during thestock market decline that began in theirst quarter of 2000 and ended in thethird quarter of 2002.Over this period,the combined market capitalization ofthe NASDAQ and NYSE fell from 1.9  \nMay 15,2005  \nThis Commentary makes a case forFed action in the event of a stockmarket bubble.Because stock marketprices serve as a signal to businessmanagers to invest,bubbles can mis-lead managers into investing vhen itis not profitable.The overinvestment,which becomes apparent after thebubble bursts,can lead to a period oflow investment,which can cause arecession.Policymakers may wish tostep in to end a bubble before stockprices get too far out of line relativeto their fundamentals.  \ntimes GDP to I times GDP.Such a fallin market wealth is estimated to havecaused a reduction in consumption of  \n0.36 percent ofGDP.(This figure is cal-culated using a reasonable estimate ofthe degree to which U.S.consumerschange their consumption when theirwealth changes—known as","cbCaidOJBoSpjpNY","https://ap.wps.com/l/cbCaidOJBoSpjpNY","pdf",1017270,"English","# Why Policymakers Might Care about Stock Market Bubbles\n## Wealth Effects\n## Tobin's q","[{\"question\":\"Why might policymakers care about stock market bubbles even if the linkage to the macroeconomy is weak?\",\"answer\":\"Because bubbles can be associated with recessions through channels that are not fully understood, and policy makers may want to intervene before prices diverge too far from fundamentals.\"},{\"question\":\"How do wealth effects from stock price declines influence consumption?\",\"answer\":\"When individuals holding stocks see prices fall, they tend to feel poorer, reduce consumption, and therefore weaken one component of aggregate demand.\"},{\"question\":\"What is the Tobin's q channel and how can a bubble affect investment?\",\"answer\":\"Tobin’s q compares market value of new investment goods to their replacement cost; when q is high, managers may invest. If bubbles inflate prices, q can signal investment that turns unprofitable after the crash, leading to reduced investment and potential recession.\"}]","Why Policymakers Might Care about Stock Market Bubbles | PDF",1789967495,13]