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Asset bubbles and inflation as competing monetary phenomena

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  • Plantin, Guillaume

Abstract

In an economy in which adjusting prices comes at a fixed menu cost, a baseline Taylor rule generates multiple equilibria with varying price rigidity, inflation, and real interest rate. Asset bubbles may be sustained as long as prices are rigid, they burst as inflation picks up and the real rate reverts to a long-term value at which bubbles are no longer sustainable. Unlike natural bubbles, these policy-induced bubbles once issued always crowd out investment by draining resources from the most financially constrained agents.

Suggested Citation

  • Plantin, Guillaume, 2023. "Asset bubbles and inflation as competing monetary phenomena," Journal of Economic Theory, Elsevier, vol. 212(C).
    • Handle: RePEc:eee:jetheo:v:212:y:2023:i:c:s0022053123001072
    DOI: 10.1016/j.jet.2023.105711
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    2. Hirano, Tomohiro & Toda, Alexis Akira, 2024. "Bubble economics," LSE Research Online Documents on Economics 122042, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Financial frictions; Bubbles; Nominal rigidities; Taylor rule;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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