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Does a low interest rate support private bubbles?

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  • Benjamin Eden

    (Department of Economics, Vanderbilt University)

Abstract

I examine the argument that a low interest rate policy can lead to "overvalued" private assets or privately created bubbles (private bubbles). Using the standard approach to bubbles, I find that a policy of a low real interest rate may support private bubbles but a policy of a low nominal interest rate may actually reduce the importance of private bubbles. I then attempt a less conventional way of modeling bubbles focusing on the supply of private bubbles. The paper uses results from the Friedman rule literature, the fiscal approach to the price level and the literature on rational bubbles.

Suggested Citation

  • Benjamin Eden, 2012. "Does a low interest rate support private bubbles?," Vanderbilt University Department of Economics Working Papers 12-00010, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:vuecon-12-00010
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Interest Rate Policy; The Friedman Rule; The Fiscal Approach to Bubbles.;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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