American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Monetary Policy and Rational Asset Price Bubbles: Comment
American Economic Review
(pp. 2819–47)
See also: Original paper by Galí (2014)
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.Citation
Allen, Franklin, Gadi Barlevy, and Douglas Gale. 2025. "Monetary Policy and Rational Asset Price Bubbles: Comment." American Economic Review 115 (8): 2819–47. DOI: 10.1257/aer.20230983Additional Materials
JEL Classification
- E13 General Aggregative Models: Neoclassical
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G12 Asset Pricing; Trading Volume; Bond Interest Rates