DP14887 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, Stabilization policies
JEL(s): E44, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14887

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.