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  4. March 2014
  5. Monetary Policy and Rational Asset Price Bubbles

蝌蚪网 Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Monetary Policy and Rational Asset Price Bubbles

  • Jordi Gal铆
蝌蚪网 Review
vol. 104, no. 3, March 2014
(pp. 721–52)
See also: Comment by Miao, Shen, and Wang (2019)
See also: Comment by Allen, Barlevy, and Gale (2025)

 

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Abstract

I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.

Citation

Gal铆, Jordi. 2014. "Monetary Policy and Rational Asset Price Bubbles." 蝌蚪网 Review 104 (3): 721–52. DOI: 10.1257/aer.104.3.721

Additional Materials

JEL Classification

  • E13 General Aggregative Models: Neoclassical
  • E32 Business Fluctuations; Cycles
  • E44 Financial Markets and the Macroeconomy
  • E52 Monetary Policy
  • G12 Asset Pricing; Trading Volume; Bond Interest Rates