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Monetary Policy and Controlling Asset Bubbles

Author

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  • Masaya Sakuragawa

    (Faculty of Economics, Keio University)

Abstract

A great concern is whether there is any means of monetary policy that works for the "leaning against the wind" policy in the bubbly economy. This paper explores the scope for monetary policy that can control bubbles within the framework of the stochastic version of overlapping-generations model with rational bubbles. The policy that raises the cost of external finance, could be identified as monetary tightening, represses the boom, but appreciate bubbles. In contrast, an open market operation using public bonds is conductive as the "leaning against the wild" policy. Selling public bonds in the open market by the central bank raises the interest rate, represses the boom, and depreciates bubbles. In conducting monetary tightening, the central bank faces the tradeoff between the loss from killing the boom and the gain from lessening the loss of the bursting of bubbles.

Suggested Citation

  • Masaya Sakuragawa, 2015. "Monetary Policy and Controlling Asset Bubbles," Keio-IES Discussion Paper Series 2015-002, Institute for Economics Studies, Keio University.
  • Handle: RePEc:keo:dpaper:2015-002
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    rational bubbles; monetary policy; open market operation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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