To Lean or Not to Lean Against an Asset Price Bubble? Empirical Evidence
Item
Title
To Lean or Not to Lean Against an Asset Price Bubble? Empirical Evidence
Loyola Faculty Contributor
Anastasios Malliaris
Link
List of Authors
Anastasios Malliaris; A. Evgenidis
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)
Date
24-Jun-20
Publication Title
Economic Inquiry
Publisher
Wiley
Identifier
10.1111/ecin.12915
Bibliographic Citation
"To Lean or Not to Lean Against an Asset Price Bubble? Empirical Evidence", Economic Inquiry, volume 58 (4), 2020, pp. 1958-1976, co-authored by Anastasios Malliaris & A. Evgenidis. https://doi.org/10.1111/ecin.12915.