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Monetary Policy and Rational Asset Price Bubbles

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  • Galí, Jordi
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    Abstract

    I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9355.

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    Date of creation: Feb 2013
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    Handle: RePEc:cpr:ceprdp:9355

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    Related research

    Keywords: Asset price volatility; Leaning against the wind policies; Monetary policy rules; Stabilization policies;

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    Cited by:
    1. Abdullah Yavas, 2013. "Asset Price Bubbles and Monetary Policy," Working Papers 102013, Hong Kong Institute for Monetary Research.

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