Monetary Policy and Rational Asset Price Bubbles: Comment
Jianjun Miao, Zhouxiang Shen, Pengfei Wang
American Economic Review · 2019 · Volume 109 · Issue 5
Abstract
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.
Keywords
General Aggregative Models: Neoclassical, Business Fluctuations, Cycles, Financial Markets and the Macroeconomy, Monetary Policy, Asset Pricing, Trading Volume, Bond Interest Rates
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