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The Monetary Policy Implications of Behavioural Asset Bubbles

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  • Rhys ap Gwilym

    (Bangor University)

Abstract

I introduce behavioural asset pricing rules into a wider dynamic stochastic general equilibrium framework. Asset price bubbles emerge endogenously within the model. I find that in this model the only monetary policy that would be likely to enhance welfare is a counter-intuitive ‘running with the wind’ policy. I conclude that the optimal policy is highly dependent on the nature of the behavioural rules that are stipulated. Given that monetary authorities have limited information about the ways in which agents actually behave, a systematic monetary policy response to asset price misalignments is unlikely to enhance welfare.

Suggested Citation

  • Rhys ap Gwilym, 2010. "The Monetary Policy Implications of Behavioural Asset Bubbles," Working Papers 10011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    • Handle: RePEc:bng:wpaper:10011
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    File URL: http://www.bangor.ac.uk/business/docs/BBSWP100011.pdf
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    Cited by:

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    2. Alexey Vasilenko, 2017. "Should Monetary Authorities Prick Asset Price Bubbles? Evidence from a New Keynesian Model with an Agent-Based Financial Market," HSE Working papers WP BRP 182/EC/2017, National Research University Higher School of Economics.

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    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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