Undesired monetary policy effects in a bubbly economy

Giuseppe Ciccarone () and Francesco Giuli
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Giuseppe Ciccarone: Sapienza University of Rome

No 270, Departmental Working Papers of Economics - University 'Roma Tre' from Department of Economics - University Roma Tre

Abstract: Monetary policy can be responsible for asset price bubble episodes under specific monetary- financial conditions. We evaluate the effects of monetary policy shocks on asset price bubbles by estimating a Markov-switching Bayesian Vector Autoregression on US 1960-2019 data, where states fortheinteractionofassetpricesandmonetaryoutcomesaffecttherealizationofbubbles. WerationalizetheevidencewithaMarkov-switchingOverlappingGenerationsmodel,generating a bubblyandano-bubblyeconomywitharegime-specific monetary policy. By matching the empirical impulse responses,we find that the monetary-financial states of the economy can generate amplifiedinstabilityunderhighequitypremiaandassetpricebubble. In abubbly economy, a monetary tightening is ineffective in reducing stockprices, increasing real rates and inflating bubbles. Expectations to switch to a nobubbly scenario produce stabilizing effects.

Keywords: monetary policy; assetpricebubble; Markov-switching; monetary-financial inter-action; policy credibility (search for similar items in EconPapers)
JEL-codes: C32 D50 E42 E52 E65 G10 (search for similar items in EconPapers)
Pages: 41
Date: 2022-07
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:rtr:wpaper:0270

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