Bubble Component Research Articles

Fiscal and Monetary Policy Interactions in a Model with Low Interest Rates

We provide a new Keynesian model where entrepreneurs face uninsurable idiosyncratic investment risk and credit constraints. Government bonds provide liquidity services. Multiple steady states with positive values of public debt can be supported for a given permanent deficit-to-output ratio. The steady-state interest rates are lower than the economic growth rate, and public debt contains a bubble component. We analyze the determinacy regions of policy parameter space and find that a large set of monetary and fiscal policy parameters can achieve debt and inflation stability given persistent fiscal deficits both away from and at the zero interest rate lower bound. (JEL E12, E23, E31, E43, E52, E62, H63)

Modeling inception and evolution of near-wall vapor thermo-cavitation bubbles via a lattice Boltzmann method

The proposed method simulates the growth and collapse mechanisms of lasers or sparks cavitation bubbles based on a double-distributed pseudo-potential thermal lattice Boltzmann method, which gives a high-temperature spot equal to or larger than the critical temperature of the fluid. This technique offers valuable insights into both the hydro- and the thermodynamics evolution of near-wall bulk bubbles. Our findings indicate that the dimensionless bubble-wall distance and the maximum radius share a correlative relationship, expressible via a piecewise function. The critical radius required for bubble inception exhibits a direct correlation with surface tension. We also observe a power-law relationship between surface tension and the maximum radius: lower surface tension results in increased deformation and a larger jet volume. The simulation results reveal the significant influence of initial input temperature on the pressure dynamics within the gas nucleus, leading to varied surface expansion velocities. However, this factor only marginally affects the surface wall expansion velocities. An increased input temperature results in intensified collapse mechanisms. Nevertheless, the elevated temperature during the initial collapse may cause an increase in pressure within the remaining bubble components, potentially leading to oscillations in the bubble radius.

Basic study on a filtering method for selectively extracting cavitation bubble region in ultrasound imaging by triplet pulse sequence

In the high-intensity focused ultrasound treatment enhanced by cavitation bubbles, monitoring cavitation bubbles is important to ensure the safety and efficacy of the treatment. In previous studies, a triplet pulse sequence (3P) was proposed to extract nonlinear echoes from bubbles. However, it was difficult to distinguish between the bubble component and the component from strong scatterers. In this study, in addition to 3P method, a filtering method to effectively extract cavitation bubble regions was proposed, and its effectiveness was experimentally examined. The proposed method extracts cavitation bubbles by setting a threshold value for the ratio of the amplitude from a 3P image to that from a 1P image (3P/1P). Under the conditions in this study (imaging frequency:2.45 MHz), the proposed can filter out the regions without bubbles by performing 3P/1P with the average values in the region of interest (2 × 2 mm2) and setting a threshold of −20 dB.

Point estimation in sign-restricted SVARs based on independence criteria with an application to rational bubbles

The median and median target estimates in sign-restricted SVARs are driven by a highly informative prior for the set-identified structural parameters. This paper proposes an approach for point elicitation by minimizing the evidence against the null hypothesis of independence with respect to the orthogonalized residuals implied by the identified set. Finite sample properties of the estimator are studied in a Monte Carlo experiment. As an empirical illustration, we analyze monetary policy effects within the rational bubble model of equity valuation (Galí, 2014). The detected monetary policy shocks lead to distinct response profiles of the fundamental and bubble components of asset prices.

A one-shot overlapping Schwarz method for component-based model reduction: application to nonlinear elasticity

We propose a component-based (CB) parametric model order reduction (pMOR) formulation for parameterized nonlinear elliptic partial differential equations (PDEs) based on overlapping subdomains. Our approach reads as a constrained optimization statement that penalizes the jump at the components’ interfaces subject to the approximate satisfaction of the PDE in each local subdomain. Furthermore, the approach relies on the decomposition of the local states into a port component – associated with the solution on interior boundaries – and a bubble component that vanishes at ports: since the bubble components are uniquely determined by the solution value at the corresponding port, we can recast the constrained optimization statement into an unconstrained statement, which reads as a nonlinear least-squares problem and can be solved using the Gauss–Newton method. We present thorough numerical investigations for a two-dimensional neo-Hookean nonlinear mechanics problem to validate our method; we further discuss the well-posedness of the mathematical formulation and the a priori error analysis for linear coercive problems.

Can monetary policy lean against housing bubbles?

Gali and Gambetti (2015) found protracted episodes in which stock prices rise in response to monetary policy tightening. This counter-intuitive result suggests that raising the policy rate in response to a perceived asset price deviation from fundamentals may fail to contain an emerging bubble. Since housing is often at the epicenter of deep and protracted recessions, it is essential (from a monetary policy perspective) to assess whether the result from Gali and Gambetti (2015) also holds when one considers housing instead of stock prices. Thus, we estimated a Bayesian VAR model based on an asset-pricing framework allowing for rational bubbles in the United States, the United Kingdom, and Canada. In addition, this estimation framework separates the fundamental component of housing prices from its bubble component, derived as the deviation of observed prices from the fundamental values. This allowed us to examine the responses of both components to a monetary policy shock and assess how bubbles may affect the responses of housing prices to monetary policy tightening. According to the results, we found that housing prices respond negatively to an interest rate hike, as common intuition would imply. This indicates that monetary policy may play a role in fighting housing price bubbles.

Growth, innovation, credit constraints, and stock price bubbles

We study the potential for rational bubbles in the innovation sector to affect long term economic growth. We show that stock market prices of research and development (R&D) firms can include a bubble component when credit constraints are present. Bubbles are self-sustained in equilibrium by a “liquidity” premium that originates when credit constraints are relaxed. Bubbles expand the borrowing and production capacities of R&D firms, stimulate innovation, and increase the growth rate. Small firms benefit more from bubbles than big firms. Bubbles are magnified by tighter credit constraints and scarce investment opportunities. Thus, financially underdeveloped countries benefit more from bubbles. Finally, we show that bubbles can create permanent reallocation effects that benefit the innovation sector over other sectors.

A generalized approach to indeterminacy in linear rational expectations models

We propose a novel approach to deal with the problem of indeterminacy in linear rational expectations models. The method consists of augmenting the original state space with a set of auxiliary exogenous equations to provide the adequate number of explosive roots in presence of indeterminacy. The solution in this expanded state space, if it exists, is always determinate, and is identical to the indeterminate solution of the original model. The proposed approach accommodates determinacy and any degree of indeterminacy, and it can be implemented even when the boundaries of the determinacy region are unknown. Thus, the researcher can estimate the model using standard software packages without restricting the estimates to the determinacy region. We combine our solution method with a novel hybrid Metropolis–Hastings algorithm to estimate the New–Keynesian model with rational bubbles by Galí (2021) over the period 1982:Q4–2007:Q3. We find that the data support the presence of two degrees of indeterminacy, implying that the central bank was not reacting strongly enough to the bubble component.

Bubbling Away: Forecasting Real Estate Prices, Rents, and Bubbles in a Transition Economy

Real housing prices have both surged and swooned in formerly socialist countries. We use 2000–2017 aggregate housing sales and rental price data from Kazakhstan to explore price movements during boom and stagnation eras, investigating the rent–price ratio’s (RPR) capacity to predict housing returns and rent growth for an emerging post-Soviet economy. RPR predicts returns better during periods of price increases than declines, and its importance in predicting the bubble component diminishes with time. Short-run RPR changes are consistent with rational bubble behavior during the period of secular upswing but different predictive variables matter during price increases and declines.

Time-varying causality in the price-rent relationship: revisiting housing bubble symptoms

According to rational bubble theory, housing prices are composed of economic fundamentals such as rent and the bubble component. While it is clear that non-causality between housing prices and rents serves as evidence of housing bubbles, within-city spillovers can be found in the causal relations. In other words, the causality test covers the detection of the housing bubbles or within-city spillovers underlying overheated housing markets. The purpose of this study is to propose a time-varying version of the Granger-causality test introduced by Shi et al. (J Financial Econom 18:158–180, 2020) in order to trace the status of housing markets across four first-tier cities in China. The empirical results indicate that there are various causal relationships, namely, within-city spillovers over time in Shanghai, Guangzhou and Shenzhen, while exuberant behavior with a housing bubble are especially noteworthy in the case of Beijing.

Google Search Queries, Foreclosures, and House Prices

We study whether Google search behavior for “mortgage assistance” and “foreclosure help” aggregated in the mortgage default risk indicator (MDRI) of Chauvet et al. (2016) helps predict future house prices and foreclosures in local residential markets. Using a long-run equilibrium model, we disaggregate house prices into their fundamental and bubble components, and we find that MDRI dampens both components of house prices. This negative relationship is robust to various model specifications and time horizons. A higher intensity of search online, however, is associated with lower future foreclosure rates. We also find that foreclosure rates increase after a decline in the fundamental component of home values, but are not sensitive to their transitory (bubble) component. Foreclosure rates are higher in metropolitan areas located in non-recourse states. We interpret these findings as evidence for strategic household behavior. Our paper sheds new light on the predictive power of household sentiment derived from Google searches on prices and foreclosure rates in local housing markets.

Rational Belief Bubbles

We propose an extension of the class of expectations bubbles (REBs) to the more general beliefs setting of Kurz (1994a,b). In a potentially non-stationary but stationarizable environment, among an heterogenous population of agents, it is possible to hold more than one rational expectation. When but diverse beliefs con- verge (correlated beliefs), they do not cancel each other out in aggregate anymore. This can make them an object of speculation. Accounting for the fact that market efficiency has an intrinsic time-dimension, we show that diverse but correlated beliefs can thus account for speculative bubbles, without the need for irrational agents or limits to arbitrage. Many of the shortcomings of REBs that make bubbles implausible can be overcome once we relax the ergodicity requirement. In particular, we argue that the hitherto unexplained bubble component of REBs corresponds to an extension of the state space in Kurz and Motolese (2011).

TO LEAN OR NOT TO LEAN AGAINST AN ASSET PRICE BUBBLE? EMPIRICAL EVIDENCE

Since the Global Financial Crisis of 2007–2009, economists are reconsidering the appropriate role of monetary policy towards equity bubbles. This paper contributes to these deliberations by estimating the response of the stock market to monetary policy tightening by using a Bayesian time‐varying VAR model. By introducing the cyclically adjusted price/earnings ratio, we propose a method that estimates its fundamental and bubble components. We find that asset prices will initially fall and eventually rise again but without the risk of feeding the bubble. Counterfactual policy experiments provide additional evidence that monetary policy can lean against equity and housing prices. (JEL E50, E52, E58)

Bubbles and Trading Frenzies: Evidence from the Art Market

The art market is subject to booms and busts in both prices and volume, which are difficult to reconcile with models where agents trade to consume. This paper shows that: (i) a high trading volume coincides with higher prices and more speculative trades, (ii) a high volume predicts negative returns, especially in the most volatile art schools, (iii) a substantial increase in transaction costs decreases art prices and can destroy the return-volume relation, and (iv) short-term transactions underperform and are riskier than long-term transactions. The evidence is consistent with a resale option model of speculative trading where the impossibility to sell short embeds a bubble component in prices. This paper suggests that speculative trading can generate significant price bubbles, even when trading costs are huge.

Speculation-Driven Business Cycles

Speculation, in the spirit of Harrison and Kreps [1978], is introduced into a standard real business cycle model. Investors (speculators) hold heterogeneous beliefs about firm growth. Firm ownership, and thus, the firm’s discount factor varies with waves of optimism and leverage. These waves ripple into firm investments in hours. The firm’s discount discount factor links the equity premium and labor volatility puzzles. We obtain an upper bound to the amplification that can be generated by speculation for any model of beliefs -- a factor of 1.5. A calibration based on diagnostic beliefs amplifies hours volatility by a factor of 1.15 and produces a bubble component of 20 percent.

Testing for multiple bubbles in the copper price: Periodically collapsing behavior

This study investigates whether multiple bubbles exist in the copper price on the basis of the Generalized Supremum Augmented Dickey-Fuller (GSADF) approach (Phillips et al., 2013). This technique delivers date-stamping strategies for the emergence as well as collapse of explosive bubble episodes and is best suited for practical application to time series. The results reveal that four explosive bubbles are detected over the period of 1980–2019 when copper price deviates from fundamental value. Besides, this finding is in accordance with the asset pricing model (Gürkaynak, 2008), which generally considers both fundamental and bubble components in the presence of asset prices. Based on the empirical results, the multiple emergence and collapse of multiple price bubbles are attributed to speculation, depreciation of the U.S. dollar, an imbalance between supply and demand, and financial crises. Policymakers should actively recognize bubble episodes and monitor their evolution, which could be conducive to achieving the effective stabilization of the international copper price. To reduce excess price fluctuations and explosive copper bubbles, authorities should impose restrictions on excessive speculative behaviors under extreme market conditions.

Rational Belief Bubbles

We propose an extension of the class of rational expectations bubbles (REBs) to the more general rational beliefs setting of \cite{Kurz:1994,Kurz:1994a}. In a potentially non-stationary but stationarizable environment, among an heterogenous population of agents, it is possible to hold more than one ``rational'' expectation. When rational but diverse beliefs converge (``correlated beliefs''), they do not cancel each other out in aggregate anymore. This can make them an object of rational speculation. Accounting for the fact that market efficiency has an intrinsic time dimension, we show that diverse but correlated beliefs can thus account for speculative bubbles, without the need for irrational agents or limits to arbitrage. Many of the shortcomings of REBs that make rational bubbles implausible can be overcome once we relax the ergodicity requirement. In particular, we argue that the hitherto unexplained ``bubble component'' of REBs corresponds to an extension of the state space in \citet{Kurz:2011}.

Are there irrational bubbles under the high residential housing prices in China’s major cities?

House prices in the main cities of China have been rising to historically high levels. Unsustainable growth of housing prices might cause financial crises and damage the whole economy. This research aims to detect whether bubbles dominate China?s real estate market. It begins by systematically analysing the features of China?s real estate sector, followed by proposing a theoretical framework to identify the fundamentals of house prices and decompose house prices into cyclical and bubble components. It then applies the vector error correction model and other econometric techniques to testify the theoretical framework with data of seven Chinese cities from 2008M01 to 2017M12. The main findings of this research include the following four parts. Firstly, the residential housing market of Shanghai was exposed to the irrational bubble issue, but the rest six cities examined were at safe positions. Secondly, both long-run and short-run relationships between economic fundamentals and house prices have been verified. Thirdly, economic regulations also have significant effects on house prices. Finally, this research suggests that the root cause of the high housing prices in major cities in China is due to the excessive capital injection into the residential property market.

Monetary policy and bubbles in US REITs

AbstractIn this article, we analyze the effects of monetary policy on the bubbles in the Real Estate Investment Trusts (REITs) sector of the United States. We use a time‐varying vector autoregressive model over the quarterly period of 1972:1 to 2018:1. We find protracted periods, starting from the onset of the recent financial crisis to the end of the sample period, where contractionary monetary policy is associated with increases in the bubble component in the REITs of the US economy. This result, which is robust to alternative REITs indexes, is contrary to the “conventional” view, as well as to the predictions of standard models of bubbles.

Debt Limits and Credit Bubbles in General Equilibrium

We provide a novel characterization of self-enforcing debt limits in a general equilibrium framework of risk sharing with limited commitment, where defaulters are subject to recourse (a fractional loss of current and future endowments) and exclusion from future credit. We show that debt limits are exactly equal to the present value of recourse plus a credit bubble component. We provide applications to models of sovereign debt, private collateralized debt, and domestic public debt. Implications include an original equivalence mapping among distinct institutional arrangements, thereby clarifying the relationship between different enforcement mechanisms and the connection between asset and credit bubbles.