Open AccessA Bayesian dynamic stochastic general equilibrium model of stock market bubbles and business cycles
Author(s) -
Miao Jianjun,
Wang Pengfei,
Xu Zhiwei
Publication year - 2015
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe505
Subject(s) - dynamic stochastic general equilibrium , economics , business cycle , stock market , recession , shock (circulatory) , stock (firearms) , bayesian probability , general equilibrium theory , econometrics , monetary economics , keynesian economics , microeconomics , monetary policy , computer science , paleontology , horse , medicine , mechanical engineering , artificial intelligence , biology , engineering
We present an estimated dynamic stochastic general equilibrium model of stock market bubbles and business cycles using Bayesian methods. Bubbles emerge through a positive feedback loop mechanism supported by self‐fulfilling beliefs. We identify a sentiment shock that drives the movements of bubbles and is transmitted to the real economy through endogenous credit constraints. This shock explains most of the stock market fluctuations and sizable fractions of the variations in real quantities. It generates the comovement between stock prices and the real economy, and is the dominant force behind the internet bubbles and the Great Recession.