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Soft landing in a Markov-switching economy

  • Alexandre, Fernando
  • Bação, Pedro
  • Gabriel, Vasco

We analyse the monetary policy implications of boom-bust cycles in asset prices using a Markov-switching rational expectations model. In our simulations, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.

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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 107 (2010)
Issue (Month): 2 (May)
Pages: 169-172

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Handle: RePEc:eee:ecolet:v:107:y:2010:i:2:p:169-172
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  1. Svensson, Lars E O & Williams, Noah, 2007. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," CEPR Discussion Papers 6331, C.E.P.R. Discussion Papers.
  2. Fernando Alexandre & Vasco J. Gabriel & Pedro Bação, 2008. "Taylor-type rules versus optimal policy in a Markov-switching economy," NIPE Working Papers 15/2008, NIPE - Universidade do Minho.
  3. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 359-413.
  4. Dupor, Bill, 2005. "Stabilizing non-fundamental asset price movements under discretion and limited information," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 727-747, May.
  5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  6. Driffill, John & Sola, Martin, 1998. "Intrinsic bubbles and regime-switching," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 357-373, July.
  7. Michael Woodford, 2007. "Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice," NBER Working Papers 13716, National Bureau of Economic Research, Inc.
  8. John B Taylor, 2007. "The Explanatory Power of Monetary Policy Rules," Business Economics, Palgrave Macmillan, vol. 42(4), pages 8-15, October.
  9. Alan Greenspan, 2004. "Risk and Uncertainty in Monetary Policy," American Economic Review, American Economic Association, vol. 94(2), pages 33-40, May.
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