Monetary Policy and Rational Asset Price Bubbles: Comment

Miao, Jianjun; Shen, Zhouxiang; Wang, Pengfei

doi:10.1257/aer.20180145

Cited by 36 publications

(18 citation statements)

References 16 publications

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“…Recently, there has been a renewed interest among macroeconomists in understanding how sentiments-in the form of correlated shocks to agents' information sets-can be drivers of aggregate fluctuations, as in the work of Angeletos and La'O 3 See, for example, the early papers by Samuelson (1958); Tirole (1985); Weil (1987); Santos and Woodford (1997); and the more recent work by Martin andVentura (2012, 2018); Asriyan, Fuchs, and Green (2016); and Miao, Shen, and Wang (2019). Barlevy (2015) provides a thorough overview of various theories of asset bubbles.…”

Section: Related Literaturementioning

confidence: 99%

Liquidity Sentiments

Asriyan

Fuchs

Green³

2019

American Economic Review

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We develop a rational theory of liquidity sentiments in which the market outcome in any given period depends on agents’ expectations about market conditions in future periods. Our theory is based on the interaction between adverse selection and resale considerations giving rise to an intertemporal coordination problem that yields multiple self-fulfilling equilibria. We construct “sentiment” equilibria in which sunspots generate fluctuations in prices, volume, and welfare, all of which are positively correlated. The intertemporal nature of the coordination problem disciplines the set of possible sentiment dynamics. In particular, sentiments must be sufficiently persistent and transitions must be stochastic. We consider an extension with production in which asset quality is endogenously determined and provide conditions under which sentiments are a necessary feature of any equilibrium. A testable implication is that assets produced in good times are of lower average quality than those produced in bad times. (JEL D84, D82, E32, E44, G12)

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Section: Related Literaturementioning

confidence: 99%

Liquidity Sentiments

Asriyan

Fuchs

Green³

2019

American Economic Review

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“…Of recent years, in regard to some dissenting opinions of strict actions and market controls, the authors in [22] stress the far-reaching positive impacts on long-run sustained economic stability at the expense of sacrifice for the moment. Likewise, in a forthcoming theoretical study, the authors in [23] arrive at the conventional conclusion that a tightening policy control is optimal for decreasing bubble fluctuation.…”

Section: Literature Reviewmentioning

confidence: 97%

Is the High Interest Rate Combined with Intense Deleveraging Campaign Desirable? A Collateral Mechanism under Stringent Credit Constraints

Qiu-yi

Lang

2018

Sustainability

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Recently, China has witnessed a continuously increasing Debt-to-GDP ratio and a vigorously expanding shadow banking sector. Housing prices hovering at a high level seriously affect the lives of ordinary residents. Disappointingly, a variety of activities such as intense deleveraging campaigns and tight monetary controls produce little effect. Why do these seemingly rightful implementations hardly work? What should governments do to stop the incessant expansion of asset bubbles? What role ought financial supervisors to play in regulating credit markets and facilitating a sustainable and inclusive economic growth? This paper sets off from the pledgeability of asset bubbles and constructs a generalized overlapping generation (OLG) model incorporating financial frictions and collateral constraints, in order to explore the bubble evolution under the alterations of market interest rates and credit conditions. The results show a unique bubble equilibrium, in which the steady-state bubble size expands when interest rate increases. Numerical results further reveal that the bubble-inflation effect of a higher interest rate is reinforced by a more stringent collateral constraint. Our research contributes to an explanation of the inefficacy of present policies and provides the following policy implications: The combination of an interest rate elevation and a strong loan restriction is in fact undesirable for suppressing asset bubbles. Not merely does it strike productivity and capital formation, but it also fosters investors to hold more risky assets to solve liquidity shortage under constrained borrowing capacity.

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“…As a result, a LAW policy could end up increasing, rather than decreasing, the size of the bubble. 1 On the other hand, Miao et al (2019) point to the existence, under certain conditions, of equilibria in which a bubble decreases in size in response to an increase in the interest rate.…”

Section: Introductionmentioning

confidence: 99%

Monetary Policy and Asset Price Bubbles: A Laboratory Experiment

Galı́

Giusti²,

Noussair

2021

Journal of Economic Dynamics and Control

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Advocates of a Leaning-Against-the-Wind monetary policy have claimed that such a policy can moderate asset price bubbles. On the other hand, there are compelling theoretical arguments that the policy would have the opposite e¤ect. We study the e¤ect of monetary policy on asset prices in a laboratory experiment with an overlapping generations structure. Participants in the role of the young generation allocate their endowment between two investments: a risky asset and a one-period riskless bond. The risky asset pays no dividend and thus capital gains are its only source of value. Consequently, its price is a pure bubble. We study how variations in the interest rate a¤ect the evolution of the bubble in an experiment with three treatments. One treatment has a …xed low interest rate, another a …xed high interest rate, and the third has a Leaning-Againstthe-Wind interest rate policy in e¤ect. We observe that the bubble increases (decreases) when interest rates are lower (higher) in the period of a policy change. However, the opposite e¤ect is observed in the following period, when higher (lower) interest rates are associated with greater (smaller) bubble growth. Direct measurement of expectations reveals a Trend-Following component.

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Monetary Policy and Rational Asset Price Bubbles: Comment

Cited by 36 publications

References 16 publications

Liquidity Sentiments

Liquidity Sentiments

Is the High Interest Rate Combined with Intense Deleveraging Campaign Desirable? A Collateral Mechanism under Stringent Credit Constraints

Monetary Policy and Asset Price Bubbles: A Laboratory Experiment

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