{"title":"Can monetary policy tame asset price fluctuations? Evaluating the dynamic trade-offs","authors":"Yuzhe Huang , Long Jin , Changchun Pan","doi":"10.1016/j.econmod.2025.107239","DOIUrl":null,"url":null,"abstract":"<div><div>Using an external instrumental variable within a Proxy TVP-SVAR framework, we investigate the dynamic trade-offs involved in employing countercyclical monetary policy to moderate asset price fluctuations. Our findings show that tightening monetary policy simultaneously curtails the money supply, suppresses asset prices, and depresses economic activity. Notably, asset prices respond more aggressively, yet recover more quickly compared to output and inflation. These impulse responses illustrate that countercyclical monetary interventions can effectively stabilize asset markets—especially when timed strategically during pronounced asset price surges—thus minimizing associated economic costs. However, achieving asset price stability often entails sacrificing some degree of monetary stability, underscoring an inherent policy trade-off. Our results provide empirical guidance for policymakers, emphasizing that, with optimal timing, monetary policy interventions can mitigate asset price bubbles efficiently, achieving substantial financial stability benefits with manageable economic trade-offs.</div></div>","PeriodicalId":48419,"journal":{"name":"Economic Modelling","volume":"151 ","pages":"Article 107239"},"PeriodicalIF":4.7000,"publicationDate":"2025-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Economic Modelling","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0264999325002342","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
Using an external instrumental variable within a Proxy TVP-SVAR framework, we investigate the dynamic trade-offs involved in employing countercyclical monetary policy to moderate asset price fluctuations. Our findings show that tightening monetary policy simultaneously curtails the money supply, suppresses asset prices, and depresses economic activity. Notably, asset prices respond more aggressively, yet recover more quickly compared to output and inflation. These impulse responses illustrate that countercyclical monetary interventions can effectively stabilize asset markets—especially when timed strategically during pronounced asset price surges—thus minimizing associated economic costs. However, achieving asset price stability often entails sacrificing some degree of monetary stability, underscoring an inherent policy trade-off. Our results provide empirical guidance for policymakers, emphasizing that, with optimal timing, monetary policy interventions can mitigate asset price bubbles efficiently, achieving substantial financial stability benefits with manageable economic trade-offs.
期刊介绍:
Economic Modelling fills a major gap in the economics literature, providing a single source of both theoretical and applied papers on economic modelling. The journal prime objective is to provide an international review of the state-of-the-art in economic modelling. Economic Modelling publishes the complete versions of many large-scale models of industrially advanced economies which have been developed for policy analysis. Examples are the Bank of England Model and the US Federal Reserve Board Model which had hitherto been unpublished. As individual models are revised and updated, the journal publishes subsequent papers dealing with these revisions, so keeping its readers as up to date as possible.