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 Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1293.
Date of creation: Apr 2011
Date of revision: Aug 2013
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Web page: http://www.econ.upf.edu/
monetary policy rules; stabilization policies; asset price volatility;
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
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- Manuel S. Santos & Michael Woodford, 1993.
"Rational Asset Pricing Bubbles,"
9304, Centro de Investigacion Economica, ITAM.
- 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.
- Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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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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