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The Stabilizing Virtues of Fiscal vs. Monetary Policy on Endogenous Bubble Fluctuations

Listed author(s):
  • Lise Clain-Chamosset-Yvrard

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Thomas Seegmuller

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

We explore the existence of endogenous fluctuations with a rational bubble and the stabilizing role of fiscal and monetary policies. Consumers' credit constraints, the role of collateral and a portfolio choice are the key ingredients of our analysis. We consider an overlapping generations model where households realize a portfolio choice between three assets with different returns (capital, money and bonds). Expectation-driven fluctuations and the multiplicity of steady states occur under a positive bubble on bonds, gross substitutability and large input substitution because of credit market imperfections. Focusing on the stabilizing role of policies, we show that a progressive taxation on capital income may rule out expectation-driven fluctuations and the multiplicity of steady states. In contrast, a monetary policy under a Taylor rule has a mitigated stabilizing role, depending on the reactiveness of the policy rule and the concavity of the utility function. When the monetary authority decides instead to fix the nominal interest rate regardless the inflation, decreasing the level of the nominal interest rate can rule out expectation-driven fluctuations, restore the uniqueness of steady states, but can damage the welfare at the steady state.

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Paper provided by HAL in its series Working Papers with number halshs-00854536.

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Date of creation: Aug 2013
Handle: RePEc:hal:wpaper:halshs-00854536
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  1. Azariadis, Costas & Reichlin, Pietro, 1996. "Increasing returns and crowding out," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 847-877, May.
  2. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "The Perils of Taylor Rules," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 40-69, January.
  3. Bosi, Stefano & Seegmuller, Thomas, 2010. "On rational exuberance," Mathematical Social Sciences, Elsevier, vol. 59(2), pages 249-270, March.
  4. Michel, Philippe & Wigniolle, Bertrand, 2005. "Cash-In-Advance Constraints, Bubbles, And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 9(01), pages 28-56, February.
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  7. Iacoviello, Matteo, 2004. "Consumption, house prices, and collateral constraints: a structural econometric analysis," Journal of Housing Economics, Elsevier, vol. 13(4), pages 304-320, December.
  8. Grandmont, Jean-Michel, 1986. "Stabilizing competitive business cycles," Journal of Economic Theory, Elsevier, vol. 40(1), pages 57-76, October.
  9. Clain-Chamosset-Yvrard, Lise & Seegmuller, Thomas, 2015. "Rational bubbles and macroeconomic fluctuations: The (de-)stabilizing role of monetary policy," Mathematical Social Sciences, Elsevier, vol. 75(C), pages 1-15.
  10. Gerhard Sorger, 2005. "Active and Passive Monetary Policy in an Overlapping Generations Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 731-748, July.
  11. Cazzavillan, Guido & Pintus, Patrick A., 2005. "On competitive cycles and sunspots in productive economies with a positive money stock," Research in Economics, Elsevier, vol. 59(2), pages 137-147, June.
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  13. Benhabib, Jess & Laroque, Guy, 1988. "On competitive cycles in productive economies," Journal of Economic Theory, Elsevier, vol. 45(1), pages 145-170, June.
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  15. Takashi Kamihigashi, 2008. "The spirit of capitalism, stock market bubbles and output fluctuations," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(1), pages 3-28.
  16. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  17. Bosi, Stefano & Seegmuller, Thomas, 2010. "On the role of progressive taxation in a Ramsey model with heterogeneous households," Journal of Mathematical Economics, Elsevier, vol. 46(6), pages 977-996, November.
  18. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  19. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
  20. repec:fth:harver:1435 is not listed on IDEAS
  21. repec:hal:journl:halshs-00268861 is not listed on IDEAS
  22. Stefano Bosi & Thomas Seegmuller, 2013. "Rational bubbles and expectation-driven fluctuations," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(1), pages 69-83, 03.
  23. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-574, May.
  24. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 219-234.
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