Bubbles over the U.S. business cycle: A macroeconometric approach

Marc-André Luik () and Dennis Wesselbaum

Journal of Macroeconomics, 2014, vol. 40, issue C, 27-41

Abstract: This paper builds a New Keynesian model with financial frictions and monetary and fiscal rules for the United States. We incorporate a rational bubble process in the (relative) price of capital. Our results show that bubbles account for a significant amount of variance in key macroeconomic variables and are as important as investment-specific shocks in explaining total variation. Further, we show that a bursting bubble creates large and long-lasting real effects. In particular, we find large effects on government debt that persist for several years.

Keywords: Bayesian methods; Bubbles; Financial frictions; Monetary and fiscal policy (search for similar items in EconPapers)
JEL-codes: C11 E32 E44 E62 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:40:y:2014:i:c:p:27-41

DOI: 10.1016/j.jmacro.2014.02.005

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