Monetary policy for a bubbly world

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• dc.contributor.author Asriyan, Vladimir
• dc.contributor.author Fornaro, Luca
• dc.contributor.author Martin, Alberto, 1974-
• dc.contributor.author Ventura, Jaume
• dc.date.accessioned 2021-03-23T10:12:46Z
• dc.date.available 2021-03-23T10:12:46Z
• dc.date.issued 2020
• dc.description.abstract What is the role of monetary policy in a bubbly world? To address this question, we study an economy in which financial frictions limit the supply of assets. The ensuing scarcity generates a demand for “unbacked” assets, i.e., assets that are backed only by the expectation of their future value. We consider two types of unbacked assets: bubbles, which are created by the private sector, and money, which is created by the central bank. Bubbles and money share many features, but they also differ in two crucial respects. First, while the rents from the creation of bubbles accrue to entrepreneurs and foster investment, the rents from money creation accrue to the central bank. Second, while bubbles are driven by market psychology, and can rise and fall according to the whims of the market, money is under the control of the central bank. We characterize the optimal monetary policy and show that, through its ability to supply assets, monetary policy plays a key role in the bubbly world. The model sheds light on the recent expansion of central bank liabilities in response to the bursting of bubbles.en
• dc.description.sponsorship We acknowledge support from the Spanish Ministry of Economy and Competitiveness (grant ECO2014-54430-P), Generalitat de Catalunya (grant 2014SGR-830 AGAUR), and Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563). In addition, Martin and Ventura acknowledge support from the ERC (Consolidator Grant FP7-615651–MacroColl and Advanced Grant FP7-249588-ABEP), and Martin thanks the IMF Research Fellowship.
• dc.format.mimetype application/pdf
• dc.identifier.citation Asriyan V, Fornaro L, Martin A, Ventura J. Monetary policy for a bubbly world. Rev Econ Stud. 2020 Aug 6;88(3):1418-56. DOI: 10.1093/restud/rdaa045
• dc.identifier.doi http://dx.doi.org/10.1093/restud/rdaa045
• dc.identifier.issn 0034-6527
• dc.identifier.uri http://hdl.handle.net/10230/46899
• dc.language.iso eng
• dc.publisher Oxford University Press
• dc.relation.ispartof The Review of economic studies. 2020 Aug 6;88(3):1418-56.
• dc.relation.projectID info:eu-repo/grantAgreement/ES/1PE/ECO2014-54430-P
• dc.relation.projectID info:eu-repo/grantAgreement/ES/1PE/SEV-2015-0563
• dc.relation.projectID info:eu-repo/grantAgreement/EC/FP7/615651
• dc.relation.projectID info:eu-repo/grantAgreement/EC/FP7/249588
• dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by-nc/4.0/
• dc.subject.keyword Financial frictionsen
• dc.subject.keyword Optimal monetary policyen
• dc.subject.keyword Liquidity trapen
• dc.title Monetary policy for a bubbly worlden
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/publishedVersion