Monetary Policy and Rational Asset Price Bubbles
AbstractI 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18806.
Date of creation: Feb 2013
Date of revision:
Note: EFG ME
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Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-02 (All new papers)
- NEP-CBA-2013-03-02 (Central Banking)
- NEP-MAC-2013-03-02 (Macroeconomics)
- NEP-MON-2013-03-02 (Monetary Economics)
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- Santos, Manuel S. & Woodford, Michael, .
"Rational asset pricing bubbles,"
Open Access publications from Universidad Carlos III de Madrid
info:hdl:10016/3913, Universidad Carlos III de Madrid.
- Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
- Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
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- Abdullah Yavas, 2013. "Asset Price Bubbles and Monetary Policy," Working Papers 102013, Hong Kong Institute for Monetary Research.
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