Munich Personal RePEc Archive

Leaning against the bubble. Can theoretical models match the empirical evidence?

Ciccarone, Giuseppe and Giuli, Francesco and Marchetti, Enrico and Tancioni, Massimiliano (2020): Leaning against the bubble. Can theoretical models match the empirical evidence?

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Abstract

By estimating a Markov-switching model, we provide new evidence on the nonlinear effects of monetary policy shocks on asset prices and on their bubble component. We show that regime-dependence is mainly driven by the states affecting the interest rate equation. We also show that, following a positive interest rate shock, an OLG model of asset price bubbles with credit frictions and sticky prices may predict an increase in the real rate, a recession/deflation and an increase in the bubble value. This result, which is new to the theoretical literature, matches both the previously existing and our empirical evidence.

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