Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations

Authors: Jordi Galí

American Economic Journal: Macroeconomics, Vol. 13, No 2, 121-67, April, 2021

I analyze an extension of the New Keynesian model that features overlapping generations of Önitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the pro-posed framework allows for the existence of rational expectations equilibria with asset price bubbles.I study the conditions under which bubble-driven áuctuations may emerge and the type of monetarypolicy rules that may prevent them. I conclude by discussing some of the modelís welfare implications

This paper originally appeared as Barcelona School of Economics Working Paper 959