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The Monetary Policy Implications of Behavioral Asset Bubbles

Rhys ap Gwilym

No E2009/18, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: I introduce behavioral asset pricing rules into a wider dynamic stochastic general equilibrium framework. Asset price bubbles emerge endogenously within the model. I find that in this model the only monetary policy that would be likely to enhance welfare is a counter-intuitive 'running with the wind' policy. I conclude that the optimal policy is highly dependent on the nature of the behavioral rules that are stipulated. Given that monetary authorities have limited information about the ways in which agents actually behave, a systematic monetary policy response to asset price misalignments is unlikely to enhance welfare.

Pages: 39 pages
Date: 2009-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: The Monetary Policy Implications of Behavioural Asset Bubbles (2010) Downloads
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