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Asset price bubbles and monetary policy in a small open economy


  • Martha López



In this paper we expanded the closed economy model by Bernanke and Gertler (1999) in order to account for the macroeconomic effects of an asset price bubble in the context of a small open economy model. During the nineties emerging market economies opened their financial accounts to foreign investment but generated growing macroeconomic imbalances in these economies. Our goal in this paper is twofold: first we want to analyze if the conclusions of Bernanke and Gertler (1999) remain in the case of a small open economy. And second, we want to compare the results in terms of macroeconomic volatility of the model for a closed economy versus the model for a small open economy. Our results show that the conclusion about the fact that the Central Bank should not react to asset price remains as in the case of a closed economy model, and that small open economies are more vulnerable to asset prices bubbles due to capital inflows and the exchange rate mechanism of the monetary policy. Therefore in small open economies the business cycle is deeper. Finally, in the face of a boom followed by a bust in an asset price bubble, macroeconomic volatility would be dampened if the monetary authority focuses only on inflation. ****** En el presente ensayo ampliamos el modelo de economía cerrada de Bernarke y Gertler (1999) con el fin de tener en cuenta los efectos macroeconómicos de la burbuja de precios de los activos en el contexto de un modelo de economía pequeña y abierta. Durante los noventa, las economías emergentes abrieron sus cuentas financieras a las inversiones extranjeras, pero esto generó un desequilibro macroeconómico creciente en estas economías. Nuestro objetivo con este estudio es doble: en primer lugar, queremos analizar si las conclusiones de Bernarke y Gertler (1999) se mantienen en el caso de una economía abierta y pequeña. En segundo lugar, queremos comparar los resultados en el ámbito de la volatilidad macroeconómica del modelo en una economía cerrada frente al modelo de de una economía abierta y pequeña. Nuestros resultados demuestran que la conclusión acerca de que el Banco Central no debería reaccionar ante los precios de los activos se mantiene como en el caso del modelo económico cerrado, y que las economías abiertas pequeñas son más vulnerables a las burbujas de precios de los activos debido a la afluencia de capital y al mecanismo de tipos de cambio de la política monetaria. Por lo tanto, el ciclo económico está más acentuado en las economías abiertas pequeñas. Por último, ante un rápido incremento seguido de una caída repentina de la burbuja de precios de los activos la volatilidad macroeconómica se vería amortiguada en caso de que la autoridad monetaria se centrase únicamente en la inflación.

Suggested Citation

  • Martha López, 2015. "Asset price bubbles and monetary policy in a small open economy," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 33(77), pages 93-102, June.
  • Handle: RePEc:col:000107:013850

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    References listed on IDEAS

    1. Martha López & Juan David Prada & Norberto Rodríguez, 2009. "Evidence For A Financial Accelerator In A Small Open Economy, And Implications For Monetary Policy," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 27(60), pages 12-45, December.
    2. Ben S. Bernanke, 2010. "Monetary policy and the housing bubble: a speech at the Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010," Speech 499, Board of Governors of the Federal Reserve System (U.S.).
    3. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 295-330, March.
    4. Don H Kim & Mico Loretan & Eli M Remolona, 2010. "Contagion and risk premia in the amplification of crisis: evidence from Asian names in the global CDS market," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 318-339, Bank for International Settlements.
    5. Olivier Jeanne & Anton Korinek, 2010. "Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach," American Economic Review, American Economic Association, vol. 100(2), pages 403-407, May.
    6. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
    7. Andrew Filardo, 2011. "The Impact of the International Financial Crisis on Asia and the Pacific: Highlighting Monetary Policy Challenges from a Negative Asset Price Bubble Perspective," BIS Working Papers 356, Bank for International Settlements.
    8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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    1. repec:vls:rojfme:v:4:y:2017:i:1:p:141-148 is not listed on IDEAS

    More about this item


    Exogenous bubble; Monetary policy; Macroeconomic volatility; DSGE model.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy


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