Paper #1561

Title:

Monetary policy and bubbles in a new Keynesian model with overlapping generations

Author:

Jordi Galí

Date:

December 2016

Abstract:

I analyze an extension of the New Keynesian model that features overlapping generations of �nitely-lived agents. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I examine the conditions under which bubbly equilibria may emerge and some of the implications for monetary policy. Monetary policies that lean against the bubble are shown to be potentially destabilizing, and likely to be dominated by in�ation targeting policies

Keywords:

Monetary policy rules, stabilization policies, asset price volatility

JEL codes:

E44, E52

Area of Research:

Macroeconomics and International Economics

Published in:

American Economic Journal: Macroeconomics, 13(2), 2021, 121-167

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