Monetary policy and rational asset bubbles: Comments
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Citation (published version)Miao, Jianjun, Zhouxiang Shen, and Pengfei Wang. 2019. "Monetary Policy and Rational Asset Price Bubbles: Comment." American Economic Review, 109 (5): pp. 1969-90. https://doi.org/10.1257/aer.20180145
We revisit Galí’s (2014) analysis by extending his model to incorporate persistent bubble shocks. We find that, under adaptive learning, a stable bubbly steady state and the associated sunspot solutions under optimal monetary policy are not E-stable. When deriving the unique forward-looking minimum stable variable (MSV) solution around an unstable bubbly steady state, we obtain results that are consistent with the conventional views: leaning against the wind policy reduces bubble volatility and is optimal. Such a steady state and the associated MSV solution are E-stable.