Asset bubbles and inflation as competing monetary phenomena

Guillaume Plantin

Journal of Economic Theory, 2023, vol. 212, issue C

Abstract: In an economy in which adjusting prices comes at a fixed menu cost, a baseline Taylor rule generates multiple equilibria with varying price rigidity, inflation, and real interest rate. Asset bubbles may be sustained as long as prices are rigid, they burst as inflation picks up and the real rate reverts to a long-term value at which bubbles are no longer sustainable. Unlike natural bubbles, these policy-induced bubbles once issued always crowd out investment by draining resources from the most financially constrained agents.

Keywords: Financial frictions; Bubbles; Nominal rigidities; Taylor rule (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:212:y:2023:i:c:s0022053123001072

DOI: 10.1016/j.jet.2023.105711

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