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Monetary Policy and Rational Asset Price Bubbles

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  • Galí, Jordi

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.

Suggested Citation

  • Galí, Jordi, 2013. "Monetary Policy and Rational Asset Price Bubbles," CEPR Discussion Papers 9355, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9355
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    7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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    Cited by:

    1. William B English & J David López-Salido & Robert J Tetlow, 2015. "The Federal Reserve’s Framework for Monetary Policy: Recent Changes and New Questions," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(1), pages 22-70, May.
    2. Jordi Galí & Luca Gambetti, 2015. "The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 233-257, January.
    3. Leroi RAPUTSOANE, 2016. "Disaggregated Credit Extension and Financial Distress in South Africa," Journal of Economics Library, KSP Journals, vol. 3(2), pages 226-240, June.
    4. Leroi RAPUTSOANE, 2015. "The lean versus clean debate and monetary policy in South Africa," Journal of Economics and Political Economy, KSP Journals, vol. 2(4), pages 467-480, December.
    5. Knight, John & Satchell, Stephen & Srivastava, Nandini, 2014. "Steady state distributions for models of locally explosive regimes: Existence and econometric implications," Economic Modelling, Elsevier, vol. 41(C), pages 281-288.
    6. Ayako Saiki & Jon Frost, 2014. "Does unconventional monetary policy affect inequality? Evidence from Japan," Applied Economics, Taylor & Francis Journals, vol. 46(36), pages 4445-4454, December.
    7. Abdullah Yavas, 2013. "Asset Price Bubbles and Monetary Policy," Working Papers 102013, Hong Kong Institute for Monetary Research.
    8. Holtemöller Oliver, 2013. "Explosive Preisentwicklung und spekulative Blasen auf Rohstoffmärkten / Explosive behavior and speculative bubbles on commodity markets," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 64(1), pages 405-420, January.
    9. Antoine Ngakosso, 2016. "Monetary Policy and Financial Stability: A CEMAC Zone Case Study," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(7), pages 244-244, July.

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    More about this item

    Keywords

    Asset price volatility; Leaning against the wind policies; Monetary policy rules; Stabilization policies;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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