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The Monetary Policy Implications of Behavioral Asset Bubbles

  • Rhys ap Gwilym

    ()

    (Bangor University, Bangor Business School, Hen Goleg, Bangor, Gwynedd LL57 2DG, Wales, UK;)

I introduce behavioral asset pricing rules into a wider dynamic stochastic general equilibrium framework. Asset price bubbles emerged endogenously within the model. I find that in this model monetary policy rules that target the mispricing of the asset have a destabilizing effect; however, a monetary policy rule that targets deviations in the price of the asset from its trend can be welfare enhancing. Such a rule would also have the benefit of being straightforward to implement.

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File URL: http://dx.doi.org/10.4284/0038-4038-2011.242
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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 80 (2013)
Issue (Month): 1 (July)
Pages: 252-270

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Handle: RePEc:sej:ancoec:v:80:1:y:2013:p:252-270
Contact details of provider: Web page: http://www.southerneconomic.org/

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