How Should Monetary Policy Respond to Asset-Price Bubbles?
Author InfoGruen, David Plumb, Michael Stone, Andrew Abstract We present a simple macroeconomic model that includes a role for an asset-price bubble. We then derive optimal monetary policy settings for two policymakers: a skeptic, for whom the best forecast of future asset prices is the current price; and an activist, whose policy recommendations take into account the complete stochastic implications of the bubble. We show that the activist’s recommendations depend sensitively on the detailed stochastic properties of the bubble. In some circumstances the activist clearly recommends tighter policy than the skeptic, but in others the appropriate recommendation is to be looser. Our results highlight the stringent informational requirements inherent in an activist policy approach to handling asset-price bubbles. Download InfoTo download: If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the F
