Monetary Policy and Rational Asset Price Bubbles: Comment
Franklin Allen, Gadi Barlevy, Douglas Gale
American Economic Review · 2025 · Volume 115 · Issue 8
Abstract
Galí (2014) showed that a monetary policy rule that raises rates when bubbles exceed some steady-state benchmark can paradoxically lead to larger deviations from steady state. Nevertheless, this comment shows that a central bank can always dampen a bubble by setting a higher-than-expected rate, although it may have to raise the rate aggressively. This is a different point from the Miao, Shen, and Wang (2019) comment on Galí (2014). They showed that when the central bank targets a different steady state than Gali considered, raising rates when bubbles exceed this alternative benchmark leads to smaller deviations from steady state.
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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