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Credit policy and asset price bubbles

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  • Caraiani, Petre
  • Luik, Marc-André
  • Wesselbaum, Dennis

Abstract

In this paper, we study the effectiveness of credit policy to stabilize the economy after a bursting asset price bubble. We estimate a DSGE model with an asset price bubble for the United States. We find that credit policy does stabilize the economy in response to a bursting asset price bubble. However, credit policy is less efficient in response to the bubble compared to a capital quality shock. The stabilizing effect on output is only roughly 30% for a bubble shock compared to a capital quality shock. Further, while credit policy increases the recovery speed for a capital quality shock it does not affect the recovery speed after a bursting bubble. We also find different dynamics under a binding zero-lower bound, but our previous qualitative findings remain unchanged.

Suggested Citation

  • Caraiani, Petre & Luik, Marc-André & Wesselbaum, Dennis, 2020. "Credit policy and asset price bubbles," Journal of Macroeconomics, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:jmacro:v:65:y:2020:i:c:s0164070420301555
    DOI: 10.1016/j.jmacro.2020.103229
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    More about this item

    Keywords

    Asset price bubbles; Bayesian methods; Credit policy; Zero-lower bound;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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