Thenotionthatinflation targeting increases the likelihood of stock market boom- bust episodes contradicts conventional wisdom. We take it that the conventional wisdom is defined by the work of Bernanke and Gertler (2000), who argue that an inflation-targeting monetary authority automatically stabilizes the stock market. The reason for this is that in the Bernanke-Gertler environment, inflation tends to rise in a stock market boom, so that an inflation targeter would raise interest rates, moderating the rise in stock prices
