16  Implicitly I am considering here the case of a central bank that responds only sporadically to stock prices, in those situations in which it perceives a bubble to be forming. Irregular deviations from a policy rule focused on output and inflation seem appropriately modeled as unanticipated movements in policy.
An alternative policy strategy would be to incorporate regular  BIS Review 42/2003  7  Second, we have seen that monetary tightening reduces stock prices primarily by increasing the risk premium for holding stocks, as opposed to raising the real interest rate or lowering expected dividends.