Monetary Policy and Speculative Asset Markets

Gregor Boehl

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: I study monetary policy in an estimated financial New-Keynesian model extended by behavioral expectation formation in the asset market. Credit frictions create a feedback between asset markets and the macroeconomy, and behaviorally motivated speculation can amplify fundamental swings in asset prices, potentially causing endogenous, nonfundamental bubbles. These features greatly improve the power of the model to replicate empirical-key moments. I find that monetary policy can indeed dampen financial cycles by carefully leaning against asset prices, but at the cost of amplifying their transmission to the macroeconomy, and of causing undesirable responses to movements in fundamentals.

Keywords: Monetary policy; nonlinear dynamics; heterogeneous expectations; credit constraints; bifurcation analysis (search for similar items in EconPapers)
JEL-codes: C63 E03 E44 E52 (search for similar items in EconPapers)
Pages: 49
Date: 2020-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac, nep-mon and nep-ore
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Journal Article: Monetary policy and speculative asset markets (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2020_224

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