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Leaning against the bubble. Can theoretical models match the empirical evidence?

Giuseppe Ciccarone, Francesco Giuli (), Enrico Marchetti and Massimiliano Tancioni ()

MPRA Paper from University Library of Munich, Germany

Abstract: By estimating a Markov-switching model, we provide new evidence on the nonlinear effects of monetary policy shocks on asset prices and on their bubble component. We show that regime-dependence is mainly driven by the states affecting the interest rate equation. We also show that, following a positive interest rate shock, an OLG model of asset price bubbles with credit frictions and sticky prices may predict an increase in the real rate, a recession/deflation and an increase in the bubble value. This result, which is new to the theoretical literature, matches both the previously existing and our empirical evidence.

Keywords: Asset price bubbles; monetary policy; overlapping generations models. (search for similar items in EconPapers)
JEL-codes: E13 E32 E44 E52 G12 (search for similar items in EconPapers)
Date: 2020-12-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-ore
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