I develop an extension of the New Keynesian model that features overlapping generations of finitely-lived agents. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I examine the conditions under which bubbly equilibria may emerge and the implications for the design of monetary policy. Monetary policies that lean against the bubble are shown to be potentially destabilizing, and likely to be dominated by ...
I develop an extension of the New Keynesian model that features overlapping generations of finitely-lived agents. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I examine the conditions under which bubbly equilibria may emerge and the implications for the design of monetary policy. Monetary policies that lean against the bubble are shown to be potentially destabilizing, and likely to be dominated by ináation targeting policies.
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