Did the FED REact to Asset Price Bubbles?

Dennis Wesselbaum and Marc-André Luik ()

No 1602, Working Papers from University of Otago, Department of Economics

Abstract: This paper investigates whether the U. S. Federal Reserve responds to asset price bubbles or not. We estimate a DSGE model featuring a financial accelerator and a process for asset price bubbles. We find evidence for a fairly strong reaction to bubbles. However, a counterfactual analysis shows that output is lower if the central banks reacts to the asset price bubble. Finally, we estimate an asymmetric version in which the central bank only reacts to positive price deviations. This version generates the best statistical fit. Including the bubble reduces the negative effects of the recent financial crisis but the symmetric response would have generated an earlier and stronger recovery.

Keywords: Bayesian Methods; Bubbles; Monetary Policy. (search for similar items in EconPapers)
JEL-codes: C11 E32 E44 E62 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2016-02, Revised 2016-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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http://www.otago.ac.nz/economics/otago511401.pdf First version, 2016 (application/pdf)

Related works:
Journal Article: Did the FED React to Asset Price Bubbles? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:otg:wpaper:1602

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