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Monetary Policy and Speculative Asset Markets

Author

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  • Gregor Boehl

Abstract

I study monetary policy in an estimated financial New-Keynesian model extended by behavioral expectation formation in the asset market. Credit frictions create a feedback between asset markets and the macroeconomy, and behaviorally motivated speculation can amplify fundamental swings in asset prices, potentially causing endogenous, nonfundamental bubbles. These features greatly improve the power of the model to replicate empirical-key moments. I find that monetary policy can indeed dampen financial cycles by carefully leaning against asset prices, but at the cost of amplifying their transmission to the macroeconomy, and of causing undesirable responses to movements in fundamentals.

Suggested Citation

  • Gregor Boehl, 2020. "Monetary Policy and Speculative Asset Markets," CRC TR 224 Discussion Paper Series crctr224_2020_224, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2020_224
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp224
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    Cited by:

    1. Boehl, Gregor & Hommes, Cars, 2025. "Rational vs. irrational beliefs in a complex world," Journal of Economic Behavior & Organization, Elsevier, vol. 232(C).
    2. Myrna Hennequin & Cars Hommes, 2024. "Managing Bubbles in Experimental Asset Markets with Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 429-454, March.
    3. Gregor Boehl & Philipp Lieberknecht, 2021. "The Hockey Stick Phillips Curve and the Zero Lower Bound," CRC TR 224 Discussion Paper Series crctr224_2021_266, University of Bonn and University of Mannheim, Germany.
    4. Boehl, Gregor & Lieberknecht, Philipp, 2025. "The hockey stick Phillips curve and the effective lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 170(C).
    5. Naifar, Nader, 2025. "Monetary policy expectations and financial Markets: A Quantile-on-Quantile connectedness approach," The North American Journal of Economics and Finance, Elsevier, vol. 77(C).

    More about this item

    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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