Abstract:
We use the LPPLS Multi-Scale Confidence Indicator approach to detect both positive and
negative bubbles in the short-, medium- and long-run for the stock markets of the G7
countries. We were able to detect major crashes and rallies in the seven stock markets
over the monthly period of 1973:02 to 2020:09. We also observed similar timing of
strong (positive and negative) LPPLS indicator values across the G7 countries, suggesting
synchronized extreme movements in these stock markets. Given this, to obtain an overall
picture of the G7, we used a panel VAR model to analyze the impact of monetary policy
shocks on the six indicators of bubbles. We found that monetary policy not only impacts
the bubble indicators but also responds to them, with the nature of the underlying
responses contingent on whether bubbles are positive or negative in nature, as well
as the time-scale we are analyzing. In light of these findings, our results have serious
implications for monetary authorities of these advanced markets in terms of sustainable
development, given the finance-growth nexus. But in general, we can conclude that
central banks of the G7 can indeed ‘‘lean against the wind’’, and they have also been
doing so under both conventional and unconventional monetary policy periods.
