Should Monetary Authorities Prick Asset Price Bubbles? Evidence from a New Keynesian Model with an Agent-Based Financial Market

We develop the approach based on the synthesis of New Keynesian macroeconomics and agent-based models, and build a model, allowing for the incorporation of behavioral and speculative factors in ?nancial markets in a New Keynesian model with a ?nancial accelerator, `a la Bernanke et al. (1999). Using our model, we study the optimal strategy of central banks in pricking asset price bubbles for the maximization of social welfare and preserving ?nancial stability. Our results show that pricking asset price bubbles can be a policy that enhances social welfare, and reduces the volatility of output and in?ation; especially, in the cases when asset price bubbles are caused by credit expansion, or when the central bank conducts effective information policy, for example, effective verbal interventions. We also argue that pricking asset price bubbles with the lack of the effectiveness of information policy, only by raising the interest rate, leads to negative consequences to social welfare and ?nancial stability