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Does a low interest rate support private bubbles?

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  • Benjamin Eden

    ()
    (Department of Economics, Vanderbilt University)

Abstract

I examine the argument that a low interest rate policy can lead to “overvalued†private assets or privately created bubbles (private bubbles). Using the standard approach to bubbles, I find that a policy of a low real interest rate may support private bubbles but a policy of a low nominal interest rate may actually reduce the importance of private bubbles. I then attempt a less conventional way of modeling bubbles focusing on the supply of private bubbles. The paper uses results from the Friedman rule literature, the fiscal approach to the price level and the literature on rational bubbles.

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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 12-00010.

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Date of creation: 11 Jul 2012
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Handle: RePEc:van:wpaper:vuecon-12-00010

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Interest Rate Policy; The Friedman Rule; The Fiscal Approach to Bubbles.;

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  1. Narayana Kocherlakota, 2010. "Taxing risk and the optimal regulation of financial institutions," Economic Policy Paper 10-3, Federal Reserve Bank of Minneapolis.
  2. Boyan Jovanovic, 2007. "Bubbles in Prices of Exhaustible Resources," NBER Working Papers 13320, National Bureau of Economic Research, Inc.
  3. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  4. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  5. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-36, December.
  6. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  7. John H. Cochrane, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," NBER Working Papers 6771, National Bureau of Economic Research, Inc.
  8. Dupor, Bill, 2000. "Exchange rates and the fiscal theory of the price level," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 613-630, June.
  9. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
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