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Is Driving Asset Prices Up Able to “Stabilize Economic Growth”?
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TitleIs Driving Asset Prices Up Able to “Stabilize Economic Growth”?  
AuthorChen Yanbin,Liu Xizhe and Chen Weize  
OrganizationRenmin University of China, RUC;; 
Key WordsAsset Price; Asset Bubble; Economic Growth; Expectation; DSGE model 
AbstractBy introducing endogenous market expectation dynamics into a DSGE model with asset bubbles and collateral constraints, this paper not only fixes up the flaw of previous literature that assumes that asset bubbles are exogenous, but also reliably answers whether China could stimulate economic growth by driving asset prices up. Our simulations show that when asset prices are being driven up, the market will increase purchases of assets and reduce investments in the real economy because of optimistic expectations. Tighter collateral constraints will amplify this mechanism, driving more money from the real economy to the fictitious economy. Therefore, driving asset prices up will lower economic output by approximately 1.5%. Meantime, because driving asset prices up is not able to stimulate the real economy, optimistic expectations of the market towards the rise in asset prices ebb and tend to change into pessimistic expectations. By contrast, the probability of the bust of asset bubbles outperforms that in the model without endogenous market expectation dynamics by 40% when asset prices are being driven up. When asset bubbles bust and the value of assets becomes zero, there is an 8% loss in economic output. In conclusion, this paper proposes that it is not advisable for China to consider driving asset prices up as a good tool of macroeconomic control to "stabilize economic growth". 
Serial NumberWP1178 
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