Discussion Paper Details

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Title: Monetary Policy and Bubbles in New Keynesian Model with Overlapping Generations

Author(s): Jordi Galí

Publication Date: June 2020

Keyword(s): Asset Price Volatility, Economic Fluctuations, monetary policy rules and Stabilization policies

Programme Area(s): Monetary Economics and Fluctuations

Abstract: I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model's welfare implications.

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Bibliographic Reference

Galí, J. 2020. 'Monetary Policy and Bubbles in New Keynesian Model with Overlapping Generations'. London, Centre for Economic Policy Research.