№ 4/2012

Stock markets play a crucial role in many economies and may influence their real sectors though different channels. In addition, instability of financial markets may cause or amplify general negative tendencies, for example, stock bubble crashes often lead to significant economic downturns in the countries and, in parallel, worsening the influence of other shocks. That is why the main goal of this article is the investigation of the necessity of policy makers’ (the National Bank of Ukraine’s) reaction to the establishment and development of stock market bubbles in order to prevent economic destabilization. To address this issue, dynamic stochastic general equilibrium (DSGE) model of Bernanke-Gertler-Girchlist was used. It belongs to the New Keynesian DSGE model with households, intermediate and final producers, government and Central Bank sectors augmented with the mechanism of financial accelerator and the model of stock market bubble. The baseline idea of financial accelerator is built on the assumption of asymmetric information when commercial bank should pay for monitoring costs to check the revenue of the enterprise which cannot repay bank’s loan. Such mechanism amplifies the influence of different shocks on the real sector of the economy. It is also assumed that there is a possibility of divergence of fundamental and actual (speculative) stock market prices causing the development of positive or negative bubble. After bursting, the bubble may lead to slowdown or even collapse of the economic system. One possibility to prevent from such pessimistic scenario is to target stock market prices in the Central Bank Taylor-type rule, that is, raise the refinancing rate when bubble starts developing in order to cold the economy and stop bubble growth and vice versa, for negative, when actual prices are lower than fundamental. The model is calibrated based on the parameters of the Ukrainian economy and used to analyze the necessity of the reaction of National Bank of Ukraine to stock market fluctuations. The four key scenarios considered in the article are based on the necessity of reaction to stock prices and the degree of optimal reaction to inflation. The criterion used to evaluate them is the minimization of the loss function, that is, the minimization of GDP and inflation fluctuations. The results of the research show that optimal strategy of the National Bank of Ukraine is aggressive (significant) reaction to inflation without correcting refinancing interest rate as a response to the changes in stock market. NBU should increase its refinancing rate approximately by two percent as a response to one percent increase of inflation and vice versa, while keeping the refinancing rate constant with respect to the changes in stock market. Intuitively, it may imply that inflation is one of the central issues in the economy, while stock market plays a minor role at this moment or stock market prices are already incorporated in the inflation and double reaction of monetary regulator is not necessary.

Keywords:dynamic stochastic general equilibrium model, financial accelerator, financial bubble, monetary policy, Bayesian econometrics