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The Stabilizing Virtues of Monetary Policy on Endogenous Bubble Fluctuations

In: Sunspots and Non-Linear Dynamics

Author

Listed:
  • Lise Clain-Chamosset-Yvrard

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM and EHESS, Centre de la Vieille Charité)

  • Thomas Seegmuller

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM and EHESS, Centre de la Vieille Charité)

Abstract

We explore the stabilizing role of monetary policy on the existence of endogenous fluctuations when the economy experiences a rational bubble. Considering an overlapping generations model, expectation-driven fluctuations are explained by a portfolio choice between three assets (capital, bonds and money), credit market imperfections and a collateral effect. They occur under a positive bubble on bonds. The key mechanism relies on the existence of gaps between the returns on assets due to financial distortions. Then, we study the stabilizing role of the monetary policy. Such a policy managed by a (standard) Taylor rule has no clear stabilizing virtues.

Suggested Citation

  • Lise Clain-Chamosset-Yvrard & Thomas Seegmuller, 2017. "The Stabilizing Virtues of Monetary Policy on Endogenous Bubble Fluctuations," Studies in Economic Theory, in: Kazuo Nishimura & Alain Venditti & Nicholas C. Yannelis (ed.), Sunspots and Non-Linear Dynamics, chapter 0, pages 231-257, Springer.
    • Handle: RePEc:spr:steccp:978-3-319-44076-7_10
    DOI: 10.1007/978-3-319-44076-7_10
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