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TO LEAN OR NOT TO LEAN AGAINST AN ASSET PRICE BUBBLE? EMPIRICAL EVIDENCE
Author(s) -
Evgenidis Anastasios,
Malliaris Anastasios G.
Publication year - 2020
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12915
Subject(s) - economics , monetary policy , monetary economics , stock (firearms) , counterfactual thinking , economic bubble , empirical evidence , equity (law) , earnings , financial economics , financial crisis , macroeconomics , finance , mechanical engineering , philosophy , epistemology , political science , law , engineering
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)