Rational bubbles in a monetary economy

Ge Zhou

The B.E. Journal of Macroeconomics, 2018, vol. 18, issue 1, 8

Abstract: This study explores rational bubbles in a monetary economy using an endogenous growth model with status seeking. Rational bubbles may arise when the money growth rate is higher than some threshold level. In a bubbly economy, a higher money growth rate leads to a larger bubble size, while the monetary policy is super-neutral. However, in a bubbleless economy, the monetary policy is non-neutral. Based on a comparative analysis of the calibrated model, I argue that an optimal monetary policy that maximizes the social welfare of a bubbleless economy may trigger bubbles and hurt the economy.

Keywords: monetary policy; rational bubbles; status seeking (search for similar items in EconPapers)
JEL-codes: E52 G12 O11 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/bejm-2016-0242

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