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Bubbles, banking and monetary policy

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  • Shim, Jae Hun

Abstract

This paper lays out a quantitative macroeconomic model with rational risk-adjusted asset bubbles and banks. The model features an imperfect financial market structure and allows bubble assets within banks. We shed light on the channels by which a sudden burst of asset bubbles leads to a recession through the banking system and evaluate “leaning against the wind” monetary policy associated with bubble volatility and welfare. Our main findings call for monetary policy rules to preemptively stabilize intermediate asset prices rather than the bubbles.

Suggested Citation

  • Shim, Jae Hun, 2025. "Bubbles, banking and monetary policy," Journal of Financial Stability, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:finsta:v:76:y:2025:i:c:s1572308924001475
    DOI: 10.1016/j.jfs.2024.101362
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    More about this item

    Keywords

    Rational risk-adjusted asset bubbles; Banks; Financial frictions; Monetary policy;
    All these keywords.

    JEL classification:

    • 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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