Monetary policy and rational asset price bubbles: comment
File(s)
Author(s)
Allen, Franklin
Barlevy, Gadi
Gale, Douglas
Type
Journal Article
Abstract
Galí (2014) showed that a monetary policy rule that raises rates when bubbles exceed some steady-state benchmark can paradoxically lead to larger deviations from steady state. Nevertheless, this comment shows that a central bank can always dampen a bubble by setting a higher-than-expected rate, although it may have to raise the rate aggressively. This is a different point from the Miao, Shen, and Wang (2019) comment on Galí (2014). They showed that when the central bank targets a different steady state than Gali considered, raising rates when bubbles exceed this alternative benchmark leads to smaller deviations from steady state.
Date Issued
2025-08-01
Date Acceptance
2025-05-27
Citation
The American Economic Review, 2025, 115 (8), pp.2819-2847
ISSN
0002-8282
Publisher
American Economic Association
Start Page
2819
End Page
2847
Journal / Book Title
The American Economic Review
Volume
115
Issue
8
Copyright Statement
Copyright © 2025 American Economic Association. All rights reserved. This is the author’s accepted manuscript made available under a CC-BY licence in accordance with Imperial’s Research Publications Open Access policy (www.imperial.ac.uk/oa-policy)
License URL
Publication Status
Published