To Lean or Not to Lean Against an Asset Price Bubble? Empirical Evidence

19 Pages Posted: 6 Oct 2020

See all articles by Anastasios Evgenidis

Anastasios Evgenidis

University of Newcastle - Newcastle University Business School

A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics

Date Written: October 1, 2020

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.

Suggested Citation

Evgenidis, Anastasios and Malliaris, A. (Tassos) G., To Lean or Not to Lean Against an Asset Price Bubble? Empirical Evidence (October 1, 2020). Economic Inquiry, Vol. 58, Issue 4, pp. 1958-1976, 2020, Available at SSRN: https://ssrn.com/abstract=3704806 or http://dx.doi.org/10.1111/ecin.12915

Anastasios Evgenidis (Contact Author)

University of Newcastle - Newcastle University Business School ( email )

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NEWCASTLE UPON TYNE, NE1 7RU
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A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

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