Shedding lights on Leaning Against the Wind

Federica Vassalli and Massimiliano Tancioni

No 178, CIMEO Working Paper Series from Centre for Investigation and Modelling of Experimental Observations (CIMEO)

Abstract: This paper studies how the efficacy of monetary policy interventions against stock market bubbles depends on the identification of monetary policy shocks. It estimates a Bayesian VAR identified with mixed zero-sign restrictions and distinguishes a pure monetary policy shock from a central bank information shock. The analysis shows that the two shocks affect asset-price components differently, where the asset price is decomposed into fundamental and bubbly components. A pure tightening monetary policy shock reduces the S&P500 Index but increases the bubble, while a central bank information shock raises the fundamental component and reduces the bubble by disclosing information about the future path of the economy. Ignoring the distinction between these shocks helps explain the ambiguity surrounding the effectiveness of leaning-against-the-wind policies.

Keywords: Monetary policy; bubbles; LAW; BVAR; asset prices; central bank information shock; leaning against the wind (search for similar items in EconPapers)
Date: 2023-01
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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:00178

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