Bubbles, banking and monetary policy

Jae Hun Shim

Journal of Financial Stability, 2025, vol. 76, issue C

Abstract: This paper lays out a quantitative macroeconomic model with rational risk-adjusted asset bubbles and banks. The model features an imperfect financial market structure and allows bubble assets within banks. We shed light on the channels by which a sudden burst of asset bubbles leads to a recession through the banking system and evaluate “leaning against the wind” monetary policy associated with bubble volatility and welfare. Our main findings call for monetary policy rules to preemptively stabilize intermediate asset prices rather than the bubbles.

Keywords: Rational risk-adjusted asset bubbles; Banks; Financial frictions; Monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:76:y:2025:i:c:s1572308924001475

DOI: 10.1016/j.jfs.2024.101362

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