TY - JOUR
T1 - To Lean or Not to Lean Against an Asset Price Bubble? Empirical Evidence
AU - Evgenidis, Anastasios
AU - Malliaris, A. (Tassos) G.
PY - 2020/10/1
Y1 - 2020/10/1
N2 - 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)
AB - 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)
UR - https://ecommons.luc.edu/business_facpubs/200
U2 - 10.1111/ecin.12915
DO - 10.1111/ecin.12915
M3 - Article
VL - 58
JO - School of Business: Faculty Publications and Other Works
JF - School of Business: Faculty Publications and Other Works
IS - 4
ER -