Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations
I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model's welfare implications.
I acknowledge the European Research Council for financial support under the European Union's Seventh Framework Programme (FP7/2007-2013, ERC Grant agreement 339656). The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Jordi Galí is a regular consultant to the Sveriges Riksbank and a member of the Deutsche Bundesbank Research Council. To his knowledge that institution does not have a financial, ideological, or political stake related to the article. No party had the right to review the paper prior to its circulation.