Monetary Policy for a Bubbly World

Vladimir Asriyan, Luca Fornaro, Alberto Martin and Jaume Ventura

No 22639, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a model of money, credit and bubbles, and use it to study the role of monetary policy in managing asset bubbles. In this model, bubbles pop up and burst, generating fluctuations in credit, investment and output. Two key insights emerge from the analysis. First, the growth rate of bubbles, which is driven by agents’ expectations, can be set in real or in nominal terms. This gives rise to a novel channel of monetary policy, as changes in the inflation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy’s ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of “conventional” and “unconventional” monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades.

JEL-codes: E32 E44 O40 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Published as Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2021. "Monetary Policy for a Bubbly World," The Review of Economic Studies, vol 88(3), pages 1418-1456.

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Related works:
Journal Article: Monetary Policy for a Bubbly World (2021)
Working Paper: Monetary policy for a bubbly world (2020)
Working Paper: Monetary Policy for a Bubbly World (2019)
Working Paper: Monetary Policy for a Bubbly World (2016)
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