Abstract
In this paper, we study the effectiveness of credit policy to stabilize the economy after a bursting asset price bubble. We estimate a DSGE model with an asset price bubble for the United States. We find that credit policy does stabilize the economy in response to a bursting asset price bubble. However, credit policy is less efficient in response to the bubble compared to a capital quality shock. The stabilizing effect on output is only roughly 30% for a bubble shock compared to a capital quality shock. Further, while credit policy increases the recovery speed for a capital quality shock it does not affect the recovery speed after a bursting bubble. We also find different dynamics under a binding zero-lower bound, but our previous qualitative findings remain unchanged.