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How Should Monetary Policy Respond to Asset-Price Bubbles?

David Gruen, Michael Plumb and Andrew Stone
Additional contact information
Michael Plumb: Reserve Bank of Australia
Andrew Stone: Reserve Bank of Australia

International Journal of Central Banking, 2005, vol. 1, issue 3

Abstract: We present a simple macroeconomic model that includes a role for an asset-price bubble. We then derive optimal monetary policy settings for two policymakers: a skeptic, for whom the best forecast of future asset prices is the current price; and an activist, whose policy recommendations take into account the complete stochastic implications of the bubble. We show that the activist’s recommendations depend sensitively on the detailed stochastic properties of the bubble. In some circumstances the activist clearly recommends tighter policy than the skeptic, but in others the appropriate recommendation is to be looser. Our results highlight the stringent informational requirements inherent in an activist policy approach to handling asset-price bubbles.

JEL-codes: E32 E52 E60 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (72)

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Related works:
Working Paper: How Should Monetary Policy Respond to Asset-Price Bubbles? (2005) Downloads
Chapter: How Should Monetary Policy Respond to Asset-price Bubbles? (2003) Downloads
Working Paper: How Should Monetary Policy Respond to Asset-price Bubbles? (2003) Downloads
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