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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.
Macroeconomics and International Economics
monetary policy rules
stabilization policies
asset price volatility
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