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A Comment on Monetary Policy and Rational Asset Price Bubbles
Franklin Allen
Gadi Barlevy
Douglas Gale
蝌蚪网 Review (Forthcoming)
Abstract
Gal铆 (2014) showed that a monetary policy rule that raises rates when bubbles exceed some steady-state benchmark can paradoxically lead to larger deviations from steady state. This comment shows that a central bank can always dampen a bubble by setting a higher-than-expected rate, although it may have to raise the rate aggressively. This is a different point from the Miao et al (2019) comment on Gal铆. They showed that when the central bank targets a different steady state than Gal铆 considered, raising rates when bubbles exceed this alternative steady state leads to smaller deviations from steady state.
