Document Type

Article

Publication Date

10-2020

Publication Title

Economic Inquiry

Volume

58

Issue

4

Pages

1958-1976

Publisher Name

Wiley

Abstract

Since the Global Financial Crisis of 2007–2009, economists are reconsidering the appropriate role of monetary policy towards equity bubbles. This paper contributes to these deliberations by estimating the response of the stock market to monetary policy tightening by using a Bayesian time‐varying VAR model. By introducing the cyclically adjusted price/earnings ratio, we propose a method that estimates its fundamental and bubble components. We find that asset prices will initially fall and eventually rise again but without the risk of feeding the bubble. Counterfactual policy experiments provide additional evidence that monetary policy can lean against equity and housing prices. (JEL E50, E52, E58)

Comments

Author Posting © The Authors, 2020. This article is posted here by permission of The Authors for personal use, not for redistribution. The article was published in Economic Inquiry, Volume 58, Issue 4, October 2020. https://doi.org/10.1111/ecin.12915

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 License.

Included in

Business Commons

Share

COinS