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The effects of monetary policy on stock market bubbles at zero lower bound: Revisiting the evidence

We revisit the results in Gali and Gambetta (2015) by reestimating their time-varying Bayesian VAR model including the shadow rate of Wu and Xia (2016). We found some significant differences when looking at the results during and in the aftermath of the crisis: with the shadow rate, the impact of mo...

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Published in:	Economics letters 2018-08, Vol.169, p.55-58
Main Authors:	Caraiani, Petre, Călin, Adrian Cantemir
Format:	Article
Language:	English
Subjects:	Aftermath Bayesian analysis Bubbles Impact analysis Monetary policy Prices Pricing policies Securities markets Stock exchanges Studies VAR
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container_title	Economics letters
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description	We revisit the results in Gali and Gambetta (2015) by reestimating their time-varying Bayesian VAR model including the shadow rate of Wu and Xia (2016). We found some significant differences when looking at the results during and in the aftermath of the crisis: with the shadow rate, the impact of monetary policy shocks on asset prices becomes negative. There is also a much lower positive impact of monetary policy shocks on bubbles when using the shadow rate. The impact is lower by almost three percentage points. •We revisit the results in Gali and Gambetta (2015) using the shadow rate for an alternative estimation.•In the alternative estimation, the response of asset to monetary policy shocks becomes negative.•Bubbles respond positively, but the response is significantly lower as compared to the baseline estimation using the federal funds rate.
doi_str_mv	10.1016/j.econlet.2018.05.014
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source	International Bibliography of the Social Sciences (IBSS); ScienceDirect Freedom Collection 2022-2024; PAIS Index
subjects	Aftermath Bayesian analysis Bubbles Impact analysis Monetary policy Prices Pricing policies Securities markets Stock exchanges Studies VAR
title	The effects of monetary policy on stock market bubbles at zero lower bound: Revisiting the evidence
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