Monetary Policy and Rational Asset Price Bubbles: Comment

2019 ◽  
Vol 109 (5) ◽  
pp. 1969-1990 ◽  
Author(s):  
Jianjun Miao ◽  
Zhouxiang Shen ◽  
Pengfei Wang
Keyword(s):  
Monetary Policy ◽  
Steady State ◽  
Adaptive Learning ◽  
Asset Price ◽  
Optimal Monetary Policy ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Leaning Against The Wind ◽  
Stable Variable ◽  
Forward Looking

We revisit Galí’s (2014 ) analysis by extending his model to incorporate persistent bubble shocks. We find that, under adaptive learning, a stable bubbly steady state and the associated sunspot solutions under optimal monetary policy are not E-stable. When deriving the unique forward-looking minimum stable variable (MSV ) solution around an unstable bubbly steady state, we obtain results that are consistent with the conventional views: leaning against the wind policy reduces bubble volatility and is optimal. Such a steady state and the associated MSV solution are E-stable. (JEL E13, E32, E44, E52, G12)

scholarly journals Monetary Policy and Rational Asset Price Bubbles

2014 ◽  
Vol 104 (3) ◽  
pp. 721-752 ◽  
Author(s):  
Jordi Galí
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Aggregate Demand ◽  
Asset Price ◽  
Optimal Monetary Policy ◽  
Monetary Policies ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Price Bubble ◽  
The Impact

I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for “leaning against the wind” monetary policies. (JEL E13, E32, E44, E52, G12)

scholarly journals TRANSACTION SERVICES AND ASSET-PRICE BUBBLES

2008 ◽  
Vol 12 (3) ◽  
pp. 378-403
Author(s):  
KEIICHIRO KOBAYASHI
Keyword(s):  
Resource Allocation ◽  
Steady State ◽  
Asset Price ◽  
Equilibrium Concept ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Equilibrium Allocation ◽  
Price Bubble ◽  
Transaction Services ◽  
Self Reference

This paper examines asset-price bubbles in an economy where a nondepletable asset (e.g., land) can provide transaction services, using a variant of the cash-in-advance model. When a landowner can borrow money immediately using land as collateral, one can say that land essentially provides a transaction service. The transaction services that such an asset can provide increase as its price rises, as the asset owner can borrow more money against the asset's increased value. Thus, an asset-price bubble can emerge due to the externality of self-reference, wherein the asset price reflects the transaction services that it can provide, whereas the amount of the transaction services reflects the asset price. If the collateral ratio of the asset (θ) and money supply (m) are not very large, a steady-state equilibrium exists where the asset price has a bubble component and resource allocation is inefficient; if θ and/or m become large, the bubble component of the asset price vanishes and the equilibrium allocation becomes efficient. The paper shows that in the case where the equilibrium concept is relaxed to allow for sticky prices and a temporary supply-demand gap, an equilibrium exists where a bubble develops temporarily and eventually bursts.

scholarly journals Should Monetary Policy Respond To Asset Price Bubbles? Revisiting the Debate

2008 ◽  
Vol 206 ◽  
pp. 25-34 ◽  
Author(s):  
Sushil Wadhwani
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Asset Prices ◽  
Asset Price ◽  
Financial System ◽  
Central Banks ◽  
Macroeconomic Performance ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Inflation Forecasts

Recent events have highlighted the importance of asset prices to central bank decisions. We argue that, in response to asset price bubbles, central banks should ‘lean against the wind’ (LATW hereafter). Even if the bubbles themselves are not significantly affected by LATW, macroeconomic performance can be improved if monetary policy reacts to asset price misalignments over and above the reaction to fixed horizon inflation forecasts. In addition, it might reduce the probability of bubbles arising at all. This article restates the case for LATW, and reviews the debate. In particular I respond to various criticisms that have been made against LATW and briefly consider alternative policies designed to make the financial system less cyclical.

Sign in / Sign up

Export Citation Format

Share Document