Monetary Policy and Bubbles in G7 Economies: Evidence from a Panel VAR Approach

Petre Caraiani, Rangan Gupta, Jacobus Nel () and Joshua Nielsen ()
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Jacobus Nel: Department of Statistics, University of Florida, 230 Newell Drive, Gainesville, FL, 32601, USA
Joshua Nielsen: Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO, 80302, USA

No 202230, Working Papers from University of Pretoria, Department of Economics

Abstract: We use the LPPLS Multi-Scale Confidence Indicator approach to detect both positive and negative bubbles at short-, medium- and long-run for the stock markets of the G7 countries. We were able to detect major crashes and rallies in the seven stock markets over the monthly period of 1973:02 to 2020:09. We also observed similar timing of strong (positive and negative) LPPLS indicator values across the G7 countries, suggesting synchronized extreme movements in these stock markets. Given this, to obtain an overall picture of the G7, we used a panel VAR model to analyze the impact of monetary policy shocks on the six indicators of bubbles. We found that monetary policy not only impact the bubble indicators, but also responds to them, with the nature of the underlying responses contingent on whether bubbles are positive or negative in nature, as well as the time-scale we are analyzing. In light of these findings, our results have serious implications for monetary authorities of these developed markets. But in general, we can conclude that central banks of the G7 can indeed ``lean against the wind", and they have also been doing so under both conventional and unconventional monetary policy periods.

Keywords: Multi-Scale Bubbles; Panel VAR; Monetary Policy; G7 Countries (search for similar items in EconPapers)
JEL-codes: C22 C32 E52 G15 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dem, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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