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Monetary Policy and Rational Asset Price Bubbles: Comment

Author

Listed:
  • Franklin Allen
  • Gadi Barlevy
  • Douglas Gale

Abstract

Galí (2014) showed that a monetary policy rule that raises rates when bubbles exceed some steady-state benchmark can paradoxically lead to larger deviations from steady state. Nevertheless, this comment shows that a central bank can always dampen a bubble by setting a higher-than-expected rate, although it may have to raise the rate aggressively. This is a different point from the Miao, Shen, and Wang (2019) comment on Galí (2014). They showed that when the central bank targets a different steady state than Gali considered, raising rates when bubbles exceed this alternative benchmark leads to smaller deviations from steady state.

Suggested Citation

  • Franklin Allen & Gadi Barlevy & Douglas Gale, 2025. "Monetary Policy and Rational Asset Price Bubbles: Comment," American Economic Review, American Economic Association, vol. 115(8), pages 2819-2847, August.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:8:p:2819-47
    DOI: 10.1257/aer.20230983
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    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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