Despite the success in controlling ináation, during the late 1990s-early 2000 international capital markets witnessed large swings in stock prices generating concern among academics and policy-makers about the impact of stock price movements on the real economy and the broader consequences of ináation targeting. Kontonikas and Ioannidis (2005) show that an ináation targeting regime with strong interest rate reaction to ináation should lead to lower stock market volatility. On the other hand, the New Environment Hypothesis (NEH, see . Borio and Lowe, 2002) claims that in an economic environment characterised by low ináation, unsustainable Önancial imbalances may build up since investors, exhibiting money illusion, consider that the real.
