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Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond nancing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) too low for too long interest rates, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favorable conditions. Keywords: DSGE model, shadow banking system, too low for too long, boom-bust JEL codes: E32, E44, E52, G24 * This is a revised version of a paper that circulated previously under the title Monetary policy shocks in a DSGE model with a shadow banking system. We thank three anonymous referees and the Editor Carl E. Walsh, as well as Ricardo Reis, Michael Woodford, José Jorge and seminar participants at the University of Porto and Columbia University, for useful comments and suggestions. Verona is grateful to the Fundação para a Ciência e Tecnologia for nancial support (Ph.D. scholarship) and the Cournot Centre (Postdoctoral fellowship). The views expressed in this paper are those of the authors and should not be attributed to the European Commission nor to the Bank of Finland.

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