Research

Working Paper

Bubbles, Endogenous Growth and Financial Stability

Abstract

This paper studies the dynamic ownership of risky asset price bubbles and its implications for financial stability and real activity in a heterogeneous agent model with occasionally binding borrowing constraints. It shows that the intensity of the banking crisis and the quantitative effects on real activity are mostly determined by both the overall contamination of the heterogeneous banking sector and the individual exposure of banks to the risky bubble. The more banks fail following the burst of the bubble, the deeper is the recession and the slower is the recovery. Importantly, the dynamics of bubble growth matters for financial stability: banks prefer to invest in the bubble at the beginning of its development, which makes this period extremely vulnerable to financial shocks. Although a banking supervision rule that dampens the impact of the bursting bubble should be very strict at the beginning of the bubble's growth, such rule weakens the financial health of the banks and makes them more vulnerable to economic shocks.



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Work in Progress

Asset Price Bubbles and Monetary Policy: Deflate the bubble?

Abstract

This paper studies monetary policy in a New Keynesian model with asset price bubbles. It shows that monetary policy targeting asset prices can partially deflate an asset price bubble and affects the way the bubble is financed.


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Stock Market Bubbles and Monetary policy: a Bayesian Analysis

Abstract

This paper develops and estimates a DSGE model with stock market bubbles and nominal rigidities using Bayesian methods. The estimation is processed using a Markov jump-linear-quadratic (MJLQ) version of this DSGE model, where uncertainty takes the form of different regimes that follow a Markov process.


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