NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tim Robinson

Melbourne Institute of Applied Economic
and Social Research
Faculty of Business and Economics
University of Melbourne
Victoria 3010
AUSTRALIA
Tel: +61 3 8344 2325

E-Mail: tim.robinson@unimelb.edu.au

NBER Working Papers and Publications

September 2006Monetary Policy, Asset-Price Bubbles, and the Zero Lower Bound
with Andrew Stone
in Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, Takatoshi Ito and Andrew K. Rose, editors
February 2005Monetary Policy, Asset-Price Bubbles and the Zero Lower Bound
with Andrew Stone: w11105
We use a simple model of a closed economy to study the recommendations of monetary policy-makers, attempting to respond optimally to an asset-price bubble whose stochastic properties they understand. We focus on the impact which the zero lower bound (ZLB) on nominal interest rates has on the recommendations of such policy-makers. For a given target inflation rate, we identify several different forms of `insurance' which policy-makers could potentially take out against encountering the ZLB due to the future bursting of a bubble. Even with perfect knowledge of the bubble process, however, which of these will be optimal varies from one type of bubble to another and, for certain bubbles, from one period to the next. It is therefore difficult to say whether the ZLB should cause policy-makers to...

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