Template-Type: ReDIF-Paper 1.0
Title: Monetary Policy and Speculative Asset Markets
Author-Name: Gregor Boehl
Author-Email: gboehl@uni-bonn.de

Classification-JEL: E44, E52, E03, C63
Keywords: Monetary policy, nonlinear dynamics, heterogeneous expectations, credit constraints, bifurcation analysis

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.

Note: 
Length: 49
Creation-Date: 2020-10
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp224
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2020_224