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

• Authors: Jordi Galí.
• BSE Working Paper: 110433 | March 17
• Keywords: monetary policy rules , stabilization policies , asset price volatility , economic fluctuations
• JEL codes: E44, E52
• monetary policy rules
• stabilization policies
• asset price volatility
• economic fluctuations

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.