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Monetary Policy and Asset Price Bubbles

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  • Christophe Blot
  • Paul Hubert
  • Fabien Labondance

Abstract

This paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate new bubble indicators for the stock and housing markets in the United States based on structural, econometric and statistical approaches. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles contrary to the “leaning against the wind” policy recommendations. Expansionary interest rate policies would inflate stock price bubbles whereas expansionary balance-sheet measures would not.

Suggested Citation

  • Christophe Blot & Paul Hubert & Fabien Labondance, 2018. "Monetary Policy and Asset Price Bubbles," EconomiX Working Papers 2018-5, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2018-5
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    Cited by:

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    2. Anastasios Evgenidis & Anastasios G. Malliaris, 2020. "To Lean Or Not To Lean Against An Asset Price Bubble? Empirical Evidence," Economic Inquiry, Western Economic Association International, vol. 58(4), pages 1958-1976, October.
    3. Andrew Filardo & Paul Hubert & Phurichai Rungcharoenkitkul, 2019. "The reaction function channel of monetary policy and the financial cycle," Documents de Travail de l'OFCE 2019-16, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Filardo, Andrew & Hubert, Paul & Rungcharoenkitkul, Phurichai, 2022. "Monetary policy reaction function and the financial cycle," Journal of Banking & Finance, Elsevier, vol. 142(C).
    5. Hui, Hon Chung, 2019. "What Do Foreign Exchange Markets Say About Election Outcomes? A Comparison Between Malaysia, Singapore and Philippines," MPRA Paper 98148, University Library of Munich, Germany.
    6. Alexey Vasilenko, 2018. "Should Central Banks Prick Asset Price Bubbles? An Analysis Based on a Financial Accelerator Model with an Agent-Based Financial Market," Bank of Russia Working Paper Series wps35, Bank of Russia.
    7. J. Liu & C.J.M. Kool, 2017. "Monetary dynamics in the euro area: a disaggregate panel approach," Working Papers 17-14, Utrecht School of Economics.
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    More about this item

    Keywords

    Booms and busts; Mispricing; Price deviations; Interest rate policy; Unconventional monetary policy; Quantitative Easing; Federal Reserve;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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