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Asset Bubbles and Inflation as Competing Monetary Phenomena

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  • Guillaume Plantin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

. In a model with multiple price-setting equilibria with varying price rigidity a` la Ball and Romer (1991), a central bank using a Taylor rule may inadvertly create asset bubbles instead of reaching its inflation target regardless of the value of the natural rate. These monetary bubbles differ from natural ones in three important ways: i) They do not push up the interest rate no matter their size and thus earn low returns themselves; ii) They burst when inflation picks up; iii) They always crowd out investment by draining resources from the most financially constrained agents.

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  • Guillaume Plantin, 2021. "Asset Bubbles and Inflation as Competing Monetary Phenomena," SciencePo Working papers Main hal-03792088, HAL.
    • Handle: RePEc:hal:spmain:hal-03792088
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03792088
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    References listed on IDEAS

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    Cited by:

    1. Tomohiro Hirano & Alexis Akira Toda, 2023. "Bubble Necessity Theorem," Papers 2305.08268, arXiv.org, revised Apr 2024.
    2. Tomohiro Hirano & Alexis Akira Toda, 2023. "Unique Equilibria in Models of Rational Asset Price Bubbles," CIGS Working Paper Series 23-005E, The Canon Institute for Global Studies.

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