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Natural Interest Rate and Asset Price Bubbles: How Bubbles Counteract Low Interest Rates

Author

Listed:
  • Jacopo Bonchi

    (Department of Social Sciences and Economics, Sapienza University of Rome)

Abstract

By developing a three-period OLG model with rational asset price bubbles and non-neutral monetary policy, I show how bubbles prevent low interest rates, when the natural rate of interest declines permanently. Bubbles push the natural interest rate up by serving as store of value (saving channel) and collateral (borrowing channel), and this avoids a long-lasting ZLB episode. Bubbles reallocate resources across generations too, and this reallocation implies welfare losses. These results shed light on the pattern of the US risk-free interest rates and on that of net worth and consumption across generations before the Great Recession.

Suggested Citation

  • Jacopo Bonchi, 2020. "Natural Interest Rate and Asset Price Bubbles: How Bubbles Counteract Low Interest Rates," Working Papers 3/20, Sapienza University of Rome, DISS.
    • Handle: RePEc:saq:wpaper:3/20
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    File URL: http://www.diss.uniroma1.it/sites/default/files/allegati/DiSSE_Bonchi_wp3_2020.pdf
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    References listed on IDEAS

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    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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