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The Stabilizing Virtues of Monetary Policy on Endogenous Bubble Fluctuations

Abstract : We explore the stabilizing role of monetary policy on the existence of endogenous fluctuations when the economy experiences a rational bubble. Considering an overlapping generations model, expectation-driven fluctuations are explained by a portfolio choice between three assets (capital, bonds and money), credit market imperfections and a collateral effect. They occur under a positive bubble on bonds. The key mechanism relies on the existence of gaps between the returns on assets due to financial distortions. Then, we study the stabilizing role of the monetary policy. Such a policy managed by a (standard) Taylor rule has no clear stabilizing virtues.
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Contributor : Elisabeth Lhuillier <>
Submitted on : Tuesday, April 11, 2017 - 5:56:27 PM
Last modification on : Wednesday, August 5, 2020 - 3:10:45 AM

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Lise Clain-Chamosset-Yvrard, Thomas Seegmuller. The Stabilizing Virtues of Monetary Policy on Endogenous Bubble Fluctuations. Nishimura, Kazuo and Venditti, Alain and Yannelis, Nicholas C. Sunspots and Non-Linear Dynamics - Essays in Honor of Jean-Michel Grandmont, 31, Springer International Publishing, pp.231-257, 2017, Studies in Economic Theory, 978-3-319-44074-3 978-3-319-44076-7. ⟨hal-01505784⟩

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