Does monetary policy affect asset prices
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Bay Poulsen, Kasper1, Forfatter
Bastkær Christensen, Frederik1, Forfatter
Bergman, Ulf Michael 2, Vejleder
1Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7001              
2Økonomisk Institut, Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7014              
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Ukontrollerede emneord: Monetary policy, Asset prices, Taylor rule, causal linkage, boom-bust cycles, lean versus clean
 Abstract: Does monetary policy affect asset prices? There are several prevailing academic explanations describing the causal linkages between monetary policy and fluctuations in asset prices. The empirical evidence suggests that asset prices do in fact stray significantly from fundamental values from time to time. Current literature suggest that the increasing importance of financial markets, leads to greater distortions and instability in financial markets and the real economy, when large scale bubbles occur. In this paper we subscribe to the conventional wisdom of a financial accelerator model as the one presented in Bernanke & Gertler (1999). In light of the recent financial crisis, it is becoming increasingly important to gain a better understanding of the extent to which fluctuations in asset markets affect the real economy and monetary policy and vice versa. From being primarily an academic issue, the European and US central banks have had to respond to two severe economic downturns inside a 10-year period. From “irrational exuberance” in stock prices of the late 1990s to troubled asset relief funds of the late 2000s, bubbles seem to be getting both more frequent and severe. The policy response of central bankers has been consistent, in that rates have been cut drastically in the wake of bubbles bursting. However, they have been more reluctant to tighten credit in response to rapid inflation of asset prices. This represents an asymmetric view, where central bankers concern themselves with cleaning up the mess, rather than actively trying to prevent the formation of bubbles. So how should central banks respond to asset prices in their pursuit of financial and macroeconomic stability?
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Bogmærk denne post:
 Type: Speciale
Alternativ titel: An empirical study of EU and the US
Alternativ titel: Påvirker pengepolitik aktiv priserne
Alternativ titel: Et empirisk studie af EU og USA
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Sprog: English - eng
 Datoer: 2012-03-15
 Sider: -
 Publiceringsinfo: København : Københavns Universitet
 Indholdsfortegnelse: Contents
Summary i
Preface vi
1. Introduction (KPB+FBC) . 1
2. Literature (KBP). 3
3. The BGG Model (FBC) . 9
3.1 The model 9
3.2 Entrepreneurial sector 10
3.3 Households 18
3.4 Retail sector . 20
3.5 Government . 22
3.6 Return to capital and stocks. 22
3.7 Demand 25
3.8 The supply side 26
3.9 The evolution of the models state variables 26
4. The lean versus clean debate and the zero lower bound (KBP) . 28
4.1 To lean or to clean? . 30
4.2 Monetary Policy Limitations: Fiscal Policy becomes the weapon of choice as Policy Makers face a binding Zero Lower Bound 37
4.3 The Fiscal Multiplier . 41
5. Identification and Implications of the recent Boom and Bust (FBC) 47
5.1 Identifying Booms and Busts 47
5.2 Low Interest Rates and Cheap Credit 52
5.3 Leverage 55
5.4 The Recent Equity and Housing Boom . 64
5.5 Asset Prices and the Real Economy 68
5.6 Macroeconomic Implications of the Bust 73
6. Cross-section regression (KBP) . 83
6.1 Empirical research on the relationship between short term interest rates and asset prices . 83
6.2 Did central banks respond according to a Taylor rule? . 84
6.3 Did the interest rate affect asset prices? 88
7. Determining the causal relationship between interest rates and asset prices for the Euro Area and the US (KBP) . 94
7.1 VAR model 94
7.2 Transformation from VAR to VEC . 98
7.3 VAR models and cointegration . 101
7.4 Granger noncausality and neutrality 108
7.5 Calculation of the Wald statistic for tests of total Granger noncausality and neutrality . 112
7.6 VAR model results 114
8. Conclusion (KPB+FBC) 124
References . 126
Appendices 135
Appendix A1 . 135
Appendix A2 . 145
Appendix A3 . 146
 Note: -
 Type: Speciale
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