The Stabilizing Virtues of Monetary Policy on Endogenous Bubble Fluctuations

Lise Clain-Chamosset-Yvrard and Thomas Seegmuller

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Abstract: We explore the stabilizing role of monetary policy on the existence of endogenous fluctuations when the economy experiences a rational bubble. Considering an overlapping generations model, expectation-driven fluctuations are explained by a portfolio choice between three assets (capital, bonds and money), credit market imperfections and a collateral effect. They occur under a positive bubble on bonds. The key mechanism relies on the existence of gaps between the returns on assets due to financial distortions. Then, we study the stabilizing role of the monetary policy. Such a policy managed by a (standard) Taylor rule has no clear stabilizing virtues.

Keywords: Economie; quantitative (search for similar items in EconPapers)
Date: 2017
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Published in Nishimura, Kazuo and Venditti, Alain and Yannelis, Nicholas C. Sunspots and Non-Linear Dynamics - Essays in Honor of Jean-Michel Grandmont, 31, Springer International Publishing, pp.231-257, 2017, Studies in Economic Theory, 978-3-319-44074-3 978-3-319-44076-7

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