Policy on the Margin: Evaluating the Impact of Margin Debt Requirements on Stock Valuations

Rapidly rising stock prices in the 1990s raised worries about potential inflationary or destabilizing effects. The use of initial margin debt requirements by the Federal Reserve was proposed to reduce the run-up in stock prices. This paper evaluates the likely impact of margin debt requirements on stock valuations. The results suggest that higher margin requirements would have had no impact on stock market valuations in the 1990s, Moreover, other forms of consumer credit are relatively more important in determining household equity positions than margin debt, making the control of margin debt not an obvious public policy choice. Economic Policy Institute, Washington DC, and Center for European Integration Studies, University of Bonn, Germany. I am grateful to Beth Almeida, Katie Baird and two anonymous referees for their comments on earlier versions of this paper. All remaining errors are my sole responsibility.