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The Monetary Policy Implications of Behavioral Asset Bubbles

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  • Rhys ap Gwilym

Abstract

I introduce behavioral asset pricing rules into a wider dynamic stochastic general equilibrium framework. Asset price bubbles emerged endogenously within the model. I find that in this model monetary policy rules that target the mispricing of the asset have a destabilizing effect; however, a monetary policy rule that targets deviations in the price of the asset from its trend can be welfare enhancing. Such a rule would also have the benefit of being straightforward to implement.

Suggested Citation

  • Rhys ap Gwilym, 2013. "The Monetary Policy Implications of Behavioral Asset Bubbles," Southern Economic Journal, John Wiley & Sons, vol. 80(1), pages 252-270, July.
    • Handle: RePEc:wly:soecon:v:80:y:2013:i:1:p:252-270
    DOI: 10.4284/0038-4038-2011.242
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