Did the FED React to Asset Price Bubbles?
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Marc-Andre Luik
Abstract
This paper investigates whether the Federal Reserve Bank (FED) reacted to asset price bubbles before the Great Recession and whether this affected macroeconomic variables. We estimate a DSGE model featuring a financial accelerator and a process for asset price bubbles with different Taylor-rule specifications. We find that a Taylor-rule with a feedback to Tobin’s Q and bubble shocks fits best. Our findings suggest that the FED followed a cleaning rather than a leaning approach prior to the global financial crisis (GFC). Then, we perform a counterfactual analysis and show that this policy created a lower interest rate prior to the GFC compared to a standard Taylor-rule without feedback to financial variables.
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© 2021 Walter de Gruyter GmbH, Berlin/Boston
Articles in the same Issue
- Frontmatter
- Contributions
- Occupational Choice and Investments in Human Capital in Informal Economies
- Asymmetric Effects of Monetary Policy
- Trend Growth and Robust Monetary Policy
- Delegating Optimal Monetary Policy Inertia in a Small-Open Economy
- Dating Structural Changes in UK Monetary Policy
- International Historical Evidence on Money Growth and Inflation: The Role of High Inflation Episodes
- Inequality, Growth, and Congestion Externalities
- The Neoclassical Growth Model and the Labor Share Decline
- Environmental Taxes and Economic Growth with Multiple Growth Engines
- Macrodynamic Modeling of Innovation Equilibria and Traps
- Advances
- Unraveling News: Reconciling Conflicting Evidence
- Did the FED React to Asset Price Bubbles?
- Agricultural Trade and Structural Change: Evidence from Paraguay
Articles in the same Issue
- Frontmatter
- Contributions
- Occupational Choice and Investments in Human Capital in Informal Economies
- Asymmetric Effects of Monetary Policy
- Trend Growth and Robust Monetary Policy
- Delegating Optimal Monetary Policy Inertia in a Small-Open Economy
- Dating Structural Changes in UK Monetary Policy
- International Historical Evidence on Money Growth and Inflation: The Role of High Inflation Episodes
- Inequality, Growth, and Congestion Externalities
- The Neoclassical Growth Model and the Labor Share Decline
- Environmental Taxes and Economic Growth with Multiple Growth Engines
- Macrodynamic Modeling of Innovation Equilibria and Traps
- Advances
- Unraveling News: Reconciling Conflicting Evidence
- Did the FED React to Asset Price Bubbles?
- Agricultural Trade and Structural Change: Evidence from Paraguay