How Should Monetary Policy Respond to Asset-Price Bubbles?

David Gruen, Michael Plumb and Andrew Stone

MPRA Paper from University Library of Munich, Germany

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: G0 G00 (search for similar items in EconPapers)
Date: 2005-05-24
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (69)

Published in International Journal of Central Banking Number 3.Volume(2005): pp. 1-33

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Related works:
Journal Article: How Should Monetary Policy Respond to Asset-Price Bubbles? (2005)
Chapter: How Should Monetary Policy Respond to Asset-price Bubbles? (2003)
Working Paper: How Should Monetary Policy Respond to Asset-price Bubbles? (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:833

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