Asset Bubbles and Monetary Policy

Feng Dong, Jianjun Miao and Pengfei Wang

Review of Economic Dynamics, 2020, vol. 37 Supplement 1, S68-S98

Abstract: We provide a model of rational bubbles in a DNK framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade bubble assets to raise their net worth. The bubble assets command a liquidity premium and can have a positive value. Monetary policy affects the conditions for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The leaning-against-the-wind interest rate policy reduces bubble volatility, but could raise inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule and exogenous shocks. (Copyright: Elsevier)

Keywords: Asset bubble; Monetary policy; Dynamic new Keynesian model; Credit constraints; Multiple equilibria; Sentiment (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (64)

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DOI: 10.1016/j.red.2020.06.003

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