Moderating Macroeconomic Bubbles Under Dispersed Information
No 1005, Working Papers from University of Florida, Department of Economics
Can waves of optimism and pessimism produce large macroeconomic bubbles, and if so, is there anything that policymakers can do about them? Yes and yes. I study a business cycle model where agents with rational expectations receive noisy signals about future productivity. The model features dispersed information, which allows aggregate noise shocks to produce frequent large bubbles in the capital stock. Because of the information friction, a policymaker with an informational advantage can improve outcomes. I consider policies that affect investment incentives by distorting the intertemporal wedge. I calculate the optimal policy rule, and find that policymakers should discourage investment booms after aggregate news shocks.
JEL-codes: D84 E21 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-fdg, nep-mac and nep-ore
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