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Asset Market Volatility and New Keynesian Macroeconomics: A Game-Theoretic Approach

Author

Listed:
  • Namun Cho

    (Seoul National University)

  • Tae-Seok Jang

    (Kyungpook National University)

Abstract

This study develops a game-theoretic approach to asset market bubbles. In our model, portfolio investments consist of risk-free and risky assets. Risky assets attract more investors who may adopt a hawk strategy, because they promise a higher return than risk-free assets. However, the economy falls into a full-blown crisis state when the portion of investment devoted to risky assets exceeds a threshold. Furthermore, we incorporate the periodic bubbles in asset markets into a New Keynesian baseline model. Our simulation results show that high volatility in asset markets increases the variability of inflation and output dynamics, while uncertainty about the dynamic economy can be amplified and hence may be seen as shocks for an inefficient distribution of wealth.

Suggested Citation

  • Namun Cho & Tae-Seok Jang, 2019. "Asset Market Volatility and New Keynesian Macroeconomics: A Game-Theoretic Approach," Computational Economics, Springer;Society for Computational Economics, vol. 54(1), pages 245-266, June.
    • Handle: RePEc:kap:compec:v:54:y:2019:i:1:d:10.1007_s10614-017-9705-5
    DOI: 10.1007/s10614-017-9705-5
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    Cited by:

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    2. Loretta Mastroeni & Maurizio Naldi & Pierluigi Vellucci, 2023. "Personal Finance Decisions with Untruthful Advisors: An Agent-Based Model," Computational Economics, Springer;Society for Computational Economics, vol. 61(4), pages 1477-1522, April.

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    More about this item

    Keywords

    Asset market bubbles; Game-theoretic; New Keynesian; Risky asset; Volatility;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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