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Credit policy and asset price bubbles

Petre Caraiani, Marc-André Luik and Dennis Wesselbaum

Journal of Macroeconomics, 2020, vol. 65, issue C

Abstract: In this paper, we study the effectiveness of credit policy to stabilize the economy after a bursting asset price bubble. We estimate a DSGE model with an asset price bubble for the United States. We find that credit policy does stabilize the economy in response to a bursting asset price bubble. However, credit policy is less efficient in response to the bubble compared to a capital quality shock. The stabilizing effect on output is only roughly 30% for a bubble shock compared to a capital quality shock. Further, while credit policy increases the recovery speed for a capital quality shock it does not affect the recovery speed after a bursting bubble. We also find different dynamics under a binding zero-lower bound, but our previous qualitative findings remain unchanged.

Keywords: Asset price bubbles; Bayesian methods; Credit policy; Zero-lower bound (search for similar items in EconPapers)
JEL-codes: C11 E32 E44 E51 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:65:y:2020:i:c:s0164070420301555

DOI: 10.1016/j.jmacro.2020.103229

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