The Monetary Policy Implications of Behavioral Asset Bubbles
AbstractI introduce behavioral asset pricing rules into a wider dynamic stochastic general equilibrium framework. Asset price bubbles emerge endogenously within the model. I find that in this model the only monetary policy that would be likely to enhance welfare is a counter-intuitive 'running with the wind' policy. I conclude that the optimal policy is highly dependent on the nature of the behavioral rules that are stipulated. Given that monetary authorities have limited information about the ways in which agents actually behave, a systematic monetary policy response to asset price misalignments is unlikely to enhance welfare.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/18.
Length: 39 pages
Date of creation: Sep 2009
Date of revision:
Contact details of provider:
Postal: Aberconway Building, Colum Drive, CARDIFF, CF10 3EU
Phone: +44 (0) 29 20874417
Fax: +44 (0) 29 20874419
Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers
More information through EDIRC
Other versions of this item:
- Rhys ap Gwilym, 2010. "The Monetary Policy Implications of Behavioural Asset Bubbles," Working Papers 10011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
- NEP-ALL-2009-10-03 (All new papers)
- NEP-CBA-2009-10-03 (Central Banking)
- NEP-DGE-2009-10-03 (Dynamic General Equilibrium)
- NEP-MAC-2009-10-03 (Macroeconomics)
- NEP-MON-2009-10-03 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ben Bernanke & Mark Gertler, 1999.
"Monetary policy and asset price volatility,"
Federal Reserve Bank of Kansas City, pages 77-128.
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999.
"The financial accelerator in a quantitative business cycle framework,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
- 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.
- David Gruen & Michael Plumb & Andrew Stone, 2003.
"How Should Monetary Policy Respond to Asset-price Bubbles?,"
RBA Research Discussion Papers
rdp2003-11, Reserve Bank of Australia.
- David Gruen & Michael Plumb & Andrew Stone, 2003. "How Should Monetary Policy Respond to Asset-price Bubbles?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
- 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, vol. 1(3), December.
- Gruen, David & Plumb, Michael & Stone, Andrew, 2005. "How Should Monetary Policy Respond to Asset-Price Bubbles?," MPRA Paper 833, University Library of Munich, Germany.
- 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.
- ap Gwilym, Rhys, 2010.
"Can behavioral finance models account for historical asset prices?,"
Elsevier, vol. 108(2), pages 187-189, August.
- 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.
- Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008.
"Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices,"
CEPR Discussion Papers
6773, C.E.P.R. Discussion Papers.
- Katrin Assenmacher-Wesche & Stefan Gerlach, 2008. "Ensuring financial stability: financial structure and the impact of monetary policy on asset prices," IEW - Working Papers 361, Institute for Empirical Research in Economics - University of Zurich.
- Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2011.
"How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 35(12), pages 2078-2104.
- 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 7537, C.E.P.R. Discussion Papers.
- Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2008. "How much nominal rigidity is there in the US economy? Testing a New Keynesian DSGE Model using indirect inference," Cardiff Economics Working Papers E2008/32, Cardiff University, Cardiff Business School, Economics Section, revised Jul 2011.
- Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
- Charles R. Bean, 2004. "Asset Prices, Financial Instability, and Monetary Policy," American Economic Review, American Economic Association, vol. 94(2), pages 14-18, May.
- Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruce Webb).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.