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Asset Bubbles and Monetary Policy

Pengfei Wang (), Jianjun Miao () and Feng Dong
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Feng Dong: Shanghai Jiao Tong University

No 205, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We provide an infinite-horizon model of rational asset bubbles in a Dynamic New Keynesian framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade land as an asset, which also serves as collateral to borrow from banks with reserve requirements. Land commands a liquidity premium and a land bubble can emerge. Monetary policy can affect the condition 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 will reduce the bubble volatility, but it may come at the cost of raising the inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule adopted by the central bank and on the exogenous shocks hitting the economy.

Date: 2017
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Journal Article: Asset Bubbles and Monetary Policy (2020) Downloads
Working Paper: Asset Bubbles and Monetary Policy (2020) Downloads
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