Monetary Policy, Financing Constraints, and Rational Asset Price Bubbles

Junming Chen

Discussion Papers from Department of Economics, University of York

Abstract: This paper studies the issue of “should monetary policy lean against rational asset price bubbles†by establishing an analytically tractable New Keynesian model with endogenous capital accumulation. Rational bubbles may exist in equilibrium because of the extra liquidity they generate for financially constrained firms when a lumpy investment opportunity arrives. Under certain conditions, bounded bubble-driven fluctuations (in output) may emerge via both supply-side and demand-side mechanisms. The monetary policy analyses of the model do not strongly favor a leaning-against-the-bubble strategy and emphasize a special overreaction risk that it may suffer from relative to its conventional counterpart.

Keywords: rational asset price bubbles; monetary policy; financing constraints; New Keynesian model (search for similar items in EconPapers)
JEL-codes: E12 E22 E32 E44 E52 E63 G12 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-inv, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:25/04

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