Soft landing in a Markov-switching economy

We analyse the monetary policy implications of boom–bust cycles in asset prices using a Markov-switching rational expectations model. In our simulations, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.

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Bibliographic Details
Published in:Economics letters 2010-05, Vol.107 (2), p.169-172
Main Authors: Alexandre, Fernando, Bação, Pedro, Gabriel, Vasco
Format: Article
Language:English
Subjects:
Asset prices
Asset prices Monetary policy Markov-switching
Markov-switching
Monetary models
Monetary policy
Rational expectations
Stock prices
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Description
Summary:We analyse the monetary policy implications of boom–bust cycles in asset prices using a Markov-switching rational expectations model. In our simulations, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2010.01.015