Discussion paper

DP15197 Asset Bubbles and Inflation as Competing Monetary Phenomena

In a model with multiple price-setting equilibria with varying price rigidity a la Ball and Romer (1991), a central bank using a Taylor rule may inadvertly create asset bubbles instead of reaching its inflation target regardless of the value of the natural rate. These monetary bubbles differ from natural ones in three important ways: i) They do not push up the interest rate no matter their size and thus earn low returns themselves; ii) They burst when inflation picks up; iii) They always crowd out investment by draining resources from the most financially constrained agents.


Plantin, G (2021), ‘DP15197 Asset Bubbles and Inflation as Competing Monetary Phenomena‘, CEPR Discussion Paper No. 15197. CEPR Press, Paris & London. https://cepr.org/publications/dp15197