My paper studies the implications of the dynamic ownership of risky asset price bubbles between banks and retail investors for financial stability and real activity. The analysis shows that the severity of banking crises and recessions depends on both the exposure of individual banks to the bubble and the overall contamination of the banking sector. The paper also highlights that the early stages of bubble growth increase the financial vulnerability of the economy, as banks increasingly invest in the bubble during this period. While stricter banking supervision can reduce the effects of a bursting bubble, it may also weaken banks’ resilience to economic shocks.
This paper develops and estimates a DSGE model with stock market bubbles and nominal rigidities using Bayesian methods. Bubbles emerge through a positive feedback loop mechanism supported by self-fulfilling beliefs. Their movements, driven by a sentiment shock, significantly contribute to fluctuations in investment, output, and inflation. 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.
This paper develops a DSGE model to study stock market dynamics. A key novelty of the framework is the introduction of firm exit and equity issuance by new entrants.
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.