Recently, the Center for International Finance and Economics Research (CIFER) of the National Institute of Financial Research at Tsinghua University hosted...Academic Symposium on "2022 International Trade Disputes and the Restructuring of Globalization"The event was successfully held.Doctoral student at Tsinghua University School of Economics and ManagementWang SiqingAttendDepend onCIFER Part-time ResearcherAssistant Research Fellow, Institute of World Economics and Politics, Chinese Academy of Social SciencesXia GuangtaoHostInternational Monetary SystemSub-forum 2Sharing with collaborators on the topic《Asset Bubbles and Monetary Policy in Open Economies》(Asset Bubbles and Monetary Policy in Open Economies) The article.
Wang Siqing He is a doctoral student in the Department of Economics, School of Economics and Management, Tsinghua University, under the supervision of Associate Professor Dong Feng. He received his bachelor's and master's degrees from the Central University of Finance and Economics. His main research areas are macroeconomics and asset bubbles.
Wang Siqing
In sharing her article with collaborators, Wang Siqing noted that since the 2008 global financial crisis, asset bubbles have received widespread public attention. Discussions about how asset prices influence monetary policy have also increased, but research considering both domestic and international factors in an open economy is relatively scarce. Therefore, the article proposes a research framework to study the impact of asset bubbles on monetary policy implementation in open economies from both theoretical and quantitative perspectives.The article constructs a model of a small open economy consisting of domestic intermediate goods enterprises, banks, capital goods producers, households, retailers, and the central bank, and analyzes the impact of asset price changes on optimal monetary policy.The article assumes that good intermediate goods firms are homogeneous but face different investment efficiency shocks, which determine their capital replacement efficiency in converting means of production into capital. To produce domestic intermediate goods, firms employ labor, import foreign means of production, and invest in capital goods. Simultaneously, firms can borrow from domestic banks but are subject to credit restrictions. Furthermore, firms can trade in bubble assets. Domestic banks act as financial intermediaries by borrowing from foreign investors and channeling the funds into the domestic bond market. Domestic banks use the external debt-elastic interest rate in cross-border lending. Retailers sell to both domestic and foreign markets at Calvo-type sticky prices, and the central bank formulates monetary policy, considering whether to react to asset prices.Wang Siqing points out that essentially useless assets can provide liquidity for companies constrained by borrowing and stock issuance. Liquidity premiums lead to asset bubbles, and the dynamic price of these bubbles affects capital allocation among heterogeneous firms, thereby impacting overall investment efficiency.The study indicates that, firstly, lower foreign interest rates favor the formation of domestic bubbles. As foreign interest rates decline, capital inflows are accompanied by rising real exchange rates and increased lending and investment. Increased domestic demand for bonds leads to lower domestic interest rates, thus fueling the bubble.Secondly, the capital allocation among firms caused by bubble prices amplifies economic fluctuations. When the economy is impacted, bubble price fluctuations have a magnifying effect. This is because bubble assets can provide liquidity for firms, and firms with better investment efficiency can expand their investment by selling bubble assets. Under negative shocks, the decline in bubble prices will reduce the investment scale of these "efficient" firms, thus amplifying overall economic fluctuations. Furthermore, compared to domestic productivity shocks, the driving effect of bubble price dynamics on aggregate dynamics is much greater under foreign interest rate shocks, because interest rate shocks directly affect the discount factor in asset pricing.Third, in the economic cycle, implementing "counter-trend" policies is crucial when foreign interest rate shocks have a significant impact on the economy. This is because asset price fluctuations following foreign interest rate shocks are much greater than those following domestic productivity shocks. In the former case, optimal monetary policy responds more strongly to price bubbles.
Luo Wenlan
School of Economics and Management, Tsinghua UniversityAssociate ProfessorLuo Wenlan The article will be reviewed from the following four aspects:First, it is recommended that the article further elaborate on the characteristics of bubble assets. Compared with traditional assets, both rely on the same mechanism to generate asset liquidity premiums; both rely on asset price deflation mechanisms to amplify shocks; and both amplify productivity shocks and foreign interest rate shocks. Whether bubble assets will have different impacts on countercyclical policies requires further explanation in the article.Second, the article can supplement the unique aspects of the open economic environment setting compared to the closed economic environment setting. In the article's model, currency appreciation is negatively correlated with the price of bubble assets, which is contrary to reality. The main reason is that the expected changes in exchange rates do not have a significant impact on bubble returns. When productivity is impacted, lending is limited by the decline in bubble asset prices.Third, adding information about the policy characteristics of an open economy would make the research more complete. For example, considerations regarding exchange rate transmission. In reality, foreign interest rate shocks do not necessarily translate into domestic interest rates. Besides exchange rate policy, capital controls are another effective policy.Fourth, it is suggested that the article further discuss whether asset bubbles are beneficial. In the article's model, asset bubbles are an effective mechanism; however, empirically, "bubble bursts" are usually associated with capital outflows and currency devaluation, which are assumed in the model by focusing on "bubble" equilibrium. Even with exogenously assumed burst probabilities, trade-offs arise when nominal stickiness exists, and these trade-offs become more pronounced in open market environments with international capital flows.
