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The Monetary Policy Implications of Behavioral Asset Bubbles

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  • Rhys ap Gwilym

    ()
    (Bangor University, Bangor Business School, Hen Goleg, Bangor, Gwynedd LL57 2DG, Wales, UK;)

Abstract

I introduce behavioral asset pricing rules into a wider dynamic stochastic general equilibrium framework. Asset price bubbles emerged endogenously within the model. I find that in this model monetary policy rules that target the mispricing of the asset have a destabilizing effect; however, a monetary policy rule that targets deviations in the price of the asset from its trend can be welfare enhancing. Such a rule would also have the benefit of being straightforward to implement.

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File URL: http://dx.doi.org/10.4284/0038-4038-2011.242
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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 80 (2013)
Issue (Month): 1 (July)
Pages: 252-270

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Handle: RePEc:sej:ancoec:v:80:1:y:2013:p:252-270

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Web page: http://www.southerneconomic.org/
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  1. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 1-14, March.
  2. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
  3. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Ensuring financial stability: Financial structure and the impact of monetary policy on asset prices," IMFS Working Paper Series 16, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  4. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2004. "The Cost of Nominal Inertia in NNS Models," NBER Working Papers 10889, National Bureau of Economic Research, Inc.
  5. David Gruen & Michael Plumb & Andrew Stone, 2005. "How Should Monetary Policy Respond to Asset-Price Bubbles?," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  6. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  7. Le, Vo Phuong Mai & Minford, Patrick & Wickens, Michael R., 2009. "How much nominal rigidity is there in the US Economy? Testing a New Keynesian DSGE model using indirect inference," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7537, C.E.P.R. Discussion Papers.
  8. ap Gwilym, Rhys, 2009. "Can behavioral finance models account for historical asset prices?," Cardiff Economics Working Papers E2009/17, Cardiff University, Cardiff Business School, Economics Section.
  9. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 181-85, May.
  10. Charles R. Bean, 2004. "Asset Prices, Financial Instability, and Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 14-18, May.
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