Monetary Policy and Rational Asset Price Bubbles

Jordi Galí

No 18806, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.

JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (8)

Published as Galí, Jordi. 2014. "Monetary Policy and Rational Asset Price Bubbles." American Economic Review, 104(3): 721-52.

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Related works:
Working Paper: Monetary Policy and Rational Asset Price Bubbles (2015)
Working Paper: Monetary Policy and Rational Asset Price Bubbles (2013)
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