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A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles

Zhiwei Xu (), Pengfei Wang () and Jianjun Miao ()

No 167, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We present an estimated DSGE model of stock market bubbles and business cycles using Bayesian methods. Bubbles emerge through a positive feedback loop mechanism supported by self-fulfilling beliefs. We identify a sentiment shock which drives the movements of bubbles and is transmitted to the real economy through endogenous credit constraints. This shock explains more than 96 percent of the stock market volatility and about 25 to 45 percent of the variations in investment and output. It generates the comovements between stock prices and macroeconomic quantities and is the dominant force in driving the internet bubbles and the Great Recession.

Date: 2013
New Economics Papers: this item is included in nep-dge and nep-mac
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More papers in 2013 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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