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Undesired monetary policy effects in a bubbly economy

Author

Listed:
  • Giuseppe Ciccarone

    (Sapienza University of Rome)

  • Francesco Giuli

Abstract

Monetary policy can be responsible for asset price bubble episodes under specific monetary- financial conditions. We evaluate the effects of monetary policy shocks on asset price bubbles by estimating a Markov-switching Bayesian Vector Autoregression on US 1960-2019 data, where states fortheinteractionofassetpricesandmonetaryoutcomesaffecttherealizationofbubbles. WerationalizetheevidencewithaMarkov-switchingOverlappingGenerationsmodel,generating a bubblyandano-bubblyeconomywitharegime-specific monetary policy. By matching the empirical impulse responses,we find that the monetary-financial states of the economy can generate amplifiedinstabilityunderhighequitypremiaandassetpricebubble. In abubbly economy, a monetary tightening is ineffective in reducing stockprices, increasing real rates and inflating bubbles. Expectations to switch to a nobubbly scenario produce stabilizing effects.

Suggested Citation

  • Giuseppe Ciccarone & Francesco Giuli, 2022. "Undesired monetary policy effects in a bubbly economy," Departmental Working Papers of Economics - University 'Roma Tre' 0270, Department of Economics - University Roma Tre.
    • Handle: RePEc:rtr:wpaper:0270
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    More about this item

    Keywords

    monetary policy; assetpricebubble; Markov-switching; monetary-financial inter-action; policy credibility;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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