Monetary Policy and Asset Price Bubbles: New Developments
Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM
- Chair: Emmanuel Farhi, Harvard University
Risky Bubbles, Public Debt and Monetary Policies
AbstractWe analyze the effects of monetary policies in a neoclassical growth model with nominal rigidities and stochastic rational bubbles, where output is determined by capital accumulation. We show that the expectations of the bubble's bursting risk and of the monetary policy stance after the bubble collapses affect the steady state and dynamics of bubbles. A conventional `leaning-against-the-wind' monetary policy of a surprise rise in the nominal interest rate decreases the bubble asset price and has typical tightening effects on output and inflation. An unconventional monetary policy of purchasing government bonds has different effects on bubbles, output and
inflation, depending on whether bubbles are small or large. The model provides new insights on interactions between monetary policy, safe government debt and risky bubbles.
AbstractWe develop a tractable rational bubble model with downward nominal wage rigidity and a zero lower bound on the nominal interest rate. We show that the collapse of a large bubble causes an undershooting of the real interest rate, which could push the economy into a persistent liquidity trap with involuntary unemployment and depressed economic activities.
Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations
AbstractI develop an extension of the basic New Keynesian model with overlapping generations of Önitely-lived agents. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria featuring asset price bubbles. I examine the conditions under which bubbly equilibria may emerge and the implications for the design of monetary policy. Monetary policies that lean against the bubble are shown to be potentially destabilizing, and likely to be dominated by ináation targeting policies.
- E4 - Money and Interest Rates
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit