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Bubbly dynamics, frictional intermediation and policy analysis

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  • Liu, Yaoju
  • Wang, Chenxi

Abstract

We perform welfare analysis of time-varying capital requirement within a DNK model with rational asset bubbles. We show that the desired cyclicality of capital requirement and its interactive mechanism with monetary policy are both contingent on the roles of bubble assets in the economy.

Suggested Citation

  • Liu, Yaoju & Wang, Chenxi, 2024. "Bubbly dynamics, frictional intermediation and policy analysis," Economics Letters, Elsevier, vol. 234(C).
    • Handle: RePEc:eee:ecolet:v:234:y:2024:i:c:s0165176523005177
    DOI: 10.1016/j.econlet.2023.111491
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    References listed on IDEAS

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    1. Garcia Revelo, Jose D. & Levieuge, Grégory, 2022. "When could Macroprudential and Monetary Policies be in Conflict?," Journal of Banking & Finance, Elsevier, vol. 139(C).
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    5. Chenxi Wang, 2023. "Asset bubbles and frictional intermediation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(3), pages 921-961, October.
    6. Feng Dong & Jianjun Miao & Pengfei Wang, 2020. "Asset Bubbles and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 68-98, August.
    7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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    9. Jordi Gal?, 2014. "Monetary Policy and Rational Asset Price Bubbles," American Economic Review, American Economic Association, vol. 104(3), pages 721-752, March.
    10. Benes, Jaromir & Kumhof, Michael, 2015. "Risky bank lending and countercyclical capital buffers," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 58-80.
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    12. Nobuhiro Kiyotaki & John Moore, 2019. "Liquidity, Business Cycles, and Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2926-2966.
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    More about this item

    Keywords

    Asset bubble; Bank; Macroprudential policy; Store of value; Collateral;
    All these keywords.

    JEL classification:

    • 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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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