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Monetary policy and rational asset price bubbles
Galí, Jordi
Universitat Pompeu Fabra. Departament d'Economia i Empresa
I examine the impact of alternative monetary policy rules on arational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interestrates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. Theoptimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper'smain findings call into question the theoretical foundations of the casefor "leaning against the wind" monetary policies.
2012-11-26
Macroeconomics and International Economics
monetary policy rules
stabilization policies
asset price volatility
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