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Temporary Bubbles and Discount Window Policy

Author

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  • Tarishi Matsuoka

    (Japan Society for the Promotion of Science and Graduate School of Economics, Kyoto University)

Abstract

This paper presents a monetary growth model where limited communication and random relocation create endogenous roles for money and banks. The economy can exhibit two different regimes. In the first, money is a dominated asset and banks economize cash reserves. In the second, money has the same return as capital and banks use the reserves as storage. I show that the economy can experience switching between the two regimes and that cyclical bubbles can occur. In addition, discount window lending is considered as a counter-bubble policy. I also show that the discount window can simultaneously lead the economy to the social optimum and stabilize bubbly fluctuations when the economy is dynamically inefficient.

Suggested Citation

  • Tarishi Matsuoka, 2011. "Temporary Bubbles and Discount Window Policy," KIER Working Papers 802, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:802
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP802.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    overlapping generations; temporary bubbles; discount window;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • 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

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