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Bubbles over the U.S. business cycle: A macroeconometric approach

  • Luik, Marc-André
  • Wesselbaum, Dennis

This paper builds a New Keynesian model with financial frictions and monetary and fiscal rules for the United States. We incorporate a rational bubble process in the (relative) price of capital. Our results show that bubbles account for a significant amount of variance in key macroeconomic variables and are as important as investment-specific shocks in explaining total variation. Further, we show that a bursting bubble creates large and long-lasting real effects. In particular, we find large effects on government debt that persist for several years.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 40 (2014)
Issue (Month): C ()
Pages: 27-41

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Handle: RePEc:eee:jmacro:v:40:y:2014:i:c:p:27-41
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