Monetary Policy and Rational Asset Price Bubbles: Comment

Franklin Allen, Gadi Barlevy and Douglas Gale

American Economic Review, 2025, vol. 115, issue 8, 2819-47

Abstract: Galí (2014) showed that a monetary policy rule that raises rates when bubbles exceed some steady-state benchmark can paradoxically lead to larger deviations from steady state. Nevertheless, this comment shows that a central bank can always dampen a bubble by setting a higher-than-expected rate, although it may have to raise the rate aggressively. This is a different point from the Miao, Shen, and Wang (2019) comment on Galí (2014). They showed that when the central bank targets a different steady state than Gali considered, raising rates when bubbles exceed this alternative benchmark leads to smaller deviations from steady state.

JEL-codes: E13 E32 E44 E52 G12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/aer.20230983

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