The Stabilizing Virtues of Monetary Policy on Endogenous Bubble Fluctuations

Lise Clain-Chamosset-Yvrard and Thomas Seegmuller ()
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Thomas Seegmuller: Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM and EHESS, Centre de la Vieille Charité

Chapter Chapter 10 in Sunspots and Non-Linear Dynamics, 2017, pp 231-257 from Springer

Abstract: 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: Indeterminacy; Rational bubble; Cash-in-advance constraint; Monetary policy; Taylor rule; D91; E32; E52 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/978-3-319-44076-7_10

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