Monetary Policy, Inflation and Rational Asset Price Bubbles

Ikeda, Daisuke

doi:10.2139/ssrn.2938298

Cited by 13 publications

(15 citation statements)

References 41 publications

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“…The OLG framework naturally incorporates household heterogeneity and incomplete market participation, which can allow a bubble to emerge without any other frictions (Samuelson (1958) and Tirole (1985)). Our infinite-horizon model features financial frictions and has the advantage of integrating into the dynamic stochastic general equilibrium framework or the DNK framework and hence has the potential to be quantified (see Ikeda (2013) and Miao, Wang, Xu (2015)). After all, asset bubbles are a quantitative observation and theory of bubbles would be vacuous if it cannot be quantified.…”

Section: Basic Intuition and Related Literaturementioning

confidence: 99%

Asset bubbles and monetary policy

Dong

Miao

Wang

2020

Review of Economic Dynamics

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We provide an infinite-horizon model of rational asset bubbles in a Dynamic New Keynesian framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade land as an asset, which also serves as collateral to borrow from banks with reserve requirements. Land commands a liquidity premium and a land bubble can emerge. Monetary policy can affect the condition for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The 'leaning against the wind' interest rate policy will reduce the bubble volatility, but it may come at the cost of raising the inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule adopted by the central bank and on the exogenous shocks hitting the economy.

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Section: Basic Intuition and Related Literaturementioning

confidence: 99%

Asset bubbles and monetary policy

Dong

Miao

Wang

2020

Review of Economic Dynamics

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“…Hence, by the asset pricing equation (30), the asset price must asymptotically grow at rate n. But, under such rapidly growing household wealth, the transversality condition (31) imposes an in…nitely high demand for consumption. This is ruled out by the resource constraint (29). Hence, in steady state, we must have q t = q for all t.…”

Section: Steady Statementioning

confidence: 99%

“…So far, we have assumed a decreasing marginal utility of wealth. Note that, in the special case of a constant marginal utility of wealth, the dynamics of consumption and capital, given by (28) and (29), are independent of the asset price q t . Thus, the economy converges to the bubble-less steady state, where r = r. However, when r n , this cannot be an equilibrium (by Lemma 3).…”

Section: Lemma 12mentioning

confidence: 99%

Wealth Preference and Rational Bubbles

2018

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We consider a neoclassical economy where households derive utility from holding wealth. We show that, under some conditions, there can be rational bubbles. Hence, we provide a microfoundation for bubbles that relies on a frictionless in…nitehorizon economy without any heterogeneity across households. While our bubbly equilibria are very similar to those obtained by Tirole (1985) in an overlapping generation economy, the underlying economics is di¤erent. Turning to public debt, we show that Ponzi schemes can be sustainable. Hence, in general, the limit on the accumulation of public debt by the government is not given by its no-Ponzi condition but, instead, by the representative household's transversality condition. The Ricardian equivalence must hold in any of our equilibria. Finally, in the presence of money, the real equilibrium structure of the economy remains unchanged. We carefully investigate the e¤ects of helicopter drops of money on the possibility of Ponzi schemes and of speculative hyperin ‡ation or de ‡ation.

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“…Economists have only recently started to examine the effects of monetary policy in environments with bubbles, although the literature is growing. Some of the papers that study monetary policy and bubbles include Galí (2014Galí ( , 2017, Ikeda (2017), Asriyan et al (2016), Dong, Miao, and Wang (2018), and Allen, Barlevy, and Gale (2018). These papers differ in some of their conclusions, in part because they analyze models with different types of frictions and in part because some of these models feature multiple equilibria and different papers focus on different equilibria within the set of all possible equilibria.…”

Section: Federal Reserve Bank Of Chicago Economic Perspectives 4 / 2018mentioning

confidence: 99%

Bridging between policymakers’ and economists’ views on bubbles

Barlevy¹

2018

Economic Perspectives

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Monetary Policy, Inflation and Rational Asset Price Bubbles

Cited by 13 publications

References 41 publications

Asset bubbles and monetary policy

Asset bubbles and monetary policy

Wealth Preference and Rational Bubbles

Bridging between policymakers’ and economists’ views on bubbles

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