Monetary policy and rational asset price bubbles

Jordi Galí

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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.

Keywords: monetary policy rules; stabilization policies; asset price volatility (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2011-04, Revised 2013-08
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Citations: View citations in EconPapers (8)

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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)
Working Paper: Monetary Policy and Rational Asset Price Bubbles (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1293

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