ABSTRACT
In many ways the effects of the 1987 stock market crash became visible in the real sector years later. The Fed intervened in 1987 with abundant liquidity and stood firm as lender of last resort, saving the real economy from a hard-landing. Stocks took a beating for a while but recovered by 1989. However, there were illside effects of the Fed’s rescue mission. The economy was awash with funds, and there were spillovers into real estate, creating an asset price boom of some magnitude. Asset price inflation spurred goods price inflation and inflationary expectations were on the rise. The twin overhangs of debt and inflated asset prices cursed the US economy in the early 1990s, posing a macroeconomic management problem for the Fed. Even though the US economy made a sluggish start to the decade, including the 1991 recession, it roared from 1995 onwards.
