Did the FED React to Asset Price Bubbles?
Luik, Marc-Andre; Wesselbaum, Dennis
This paper investigates whether the U. S. Federal Reserve responds to asset price bubbles or not. We estimate a DSGE model featuring a financial accelerator and a process for asset price bubbles. We find evidence for a fairly strong reaction to bubbles. However, a counterfactual analysis shows that output is lower if the central banks reacts to the asset price bubble. Finally, we estimate an asymmetric version in which the central bank only reacts to positive price deviations. This version generates the best statistical fit. Including the bubble reduces the negative effects of the recent financial crisis but the symmetric response would have generated an earlier and stronger recovery.
Publisher: University of Otago
Series number: 1602
Keywords: Bayesian Methods; Bubbles; Monetary Policy.
Research Type: Discussion Paper
The following licence files are associated with this item: