DP14887 Monetary Policy and Bubbles in New Keynesian Model with Overlapping Generations
|Publication Date:||June 2020|
|Keyword(s):||Asset Price Volatility, Economic Fluctuations, monetary policy rules, Stabilization policies|
|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.