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BUBPOL Informe resumido

Project ID: 339656
Financiado con arreglo a: FP7-IDEAS-ERC
País: Spain

Mid-Term Report Summary - BUBPOL (Monetary Policy and Asset Price Bubbles)

The objectives of the BUBPOL project are twofold. Firstly, the development of a framework that may be used to analyze rigorously the implications of alternative monetary policy rules in the presence of asset price bubbles. Secondly, the assessment of the evidence regarding the effects of monetary policy on asset price bubbles.

A significant inroad into attaining the first objective has been made in “Monetary Policy and Rational Asset Price Bubbles,” (AER 2014), where an overlapping generations model with nominal rigidities is developed. The analysis of the equilibrium of the model shows that a systematic increase in interest rates in response to a growing bubble enhances the fluctuations in the latter, introducing unnecessary fluctuations in consumption. That finding thus calls into question the theoretical foundations of the case for "leaning against the wind" monetary policies.

The second objective has been addressed in my paper “The Effects of Monetary Policy on Stock Market Bubbles some Evidence” (AEJ-Macro 2015, with L. Gambetti). In that paper we provide evidence pointing to protracted episodes in which stock prices end up increasing persistently in response to an exogenous tightening of monetary policy. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless model, but is consistent with the predictions of a sticky price model with rational bubbles, like the one developed in the AER paper.

Reported by

Centre de Recerca en Economia Internacional (CREI)
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