E-mail alert  |  Contact  
Search:       Go  
Background  |   Sponsoring institutions  |   Editorial board   |   Advisory board   |   Associate editors
Call for papers  |   Submission guidelines  |   Editorial process
Current issue  |   Past issues  |  
December issue
List of authors
 
Gruen, Plumb, Stone
Francis, Owyang, Theodorou
Allington, Kattuman, Waldmann
Boivin, Ng
Vega, Winkelried
Svensson, Tetlow
IJCB Home   Read the journal   Past issues
Past issues
2014
 
June
March
2013
 
December
September
June
March
January
2012
 
December
September
June
March
January
2011
 
December
September
June
March
2010
 
December
September
June
March
2009
 
December
September
June
March
2008
 
December
September
June
March
2007
 
December
September
June
March
2006
 
December
September
June
March
2005
 
December
September
May

How Should Monetary Policy Respond to Asset-Price Bubbles?

by David Gruen (Australian Treasury), Michael Plumb and Andrew Stone (Reserve Bank of Australia)

Abstract

We present a simple macroeconomic model that includes a role for an asset-price bubble. We then derive optimal monetary policy settings for two policymakers: a skeptic, for whom the best forecast of future asset prices is the current price; and an activist, whose policy recommendations take into account the complete stochastic implications of the bubble. We show that the activistís recommendations depend sensitively on the detailed stochastic properties of the bubble. In some circumstances the activist clearly recommends tighter policy than the skeptic, but in others the appropriate recommendation is to be looser. Our results highlight the stringent informational requirements inherent in an activist policy approach to handling asset-price bubbles.

JEL Codes: E32, E52, E60.

 
Full article (PDF, 31 pages 243 kb)