A Comment on Monetary Policy and Rational Asset Price Bubbles

Franklin Allen, Gadi Barlevy and Douglas Gale

No WP 2023-25, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Galí (2014) showed that a monetary policy rule that raises interest rates in response to bubbles can paradoxically lead to larger bubbles. This comment shows that a central bank that wants to dampen bubbles can always do so by raising interest rates aggressively enough. This result is different from the Miao, Shen and Wang (2019) comment on Galí’s paper. They argue Galí’s model contains additional equilibria in which more aggressive rules dampen bubbles. We show that for these equilibria, more aggressive rules involve threats to raise interest rates more than actual rate increases.

Pages: 33
Date: 2023-07-23
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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Citations: View citations in EconPapers (6)

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