Monetary policy and bubbles in a new Keynesian model with overlapping generations

Galí, Jordi

Monetary policy and bubbles in a new Keynesian model with overlapping generations

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American Economic Journal: Macroeconomics, 13(2), 2021, 121-167

Abstract

I analyze an extension of the New Keynesian model that features overlapping generations of Önitely-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 some of the implications for monetary policy. Monetary policies that lean against the bubble are shown to be potentially destabilizing, and likely to be dominated by ináation targeting policies