Economics, Econometrics and Finance
8 years ago

New model shows how monetary policy can prevent asset price bubbles.

American Economic Journal Macroeconomics
Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations
Jordi Galı́

Paper Summary

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The article explores how monetary policy can influence the occurrence of asset price bubbles in a model with overlapping generations of agents. By allowing for rational expectations equilibria with bubbles, the study shows that certain conditions can lead to bubble-driven fluctuations. The researchers also identify specific monetary policy rules that can help prevent these bubbles from forming. Overall, the findings shed light on the potential welfare implications of such bubble phenomena.