Monetary Policy and Transmission of Bubbles

Sakuragawa, Masaya; Shinada, Naoki

The aim of this paper is to investigate the optimal monetary policy when bubbles boost and burst. The monetary policy in the form of open market operation has real effects, that is, influences the growth in investment and the size of bubbles. The central bank faces a trade-off between stimulating investment and appreciating bubbles. The optimal policy is contingent on the state of bubbles. When bubbles arise, the central bank may maintain or gives up easing, depending on how it puts weight on the state of the bursting of bubbles, while when bubbles burst, the central bank takes an easing policy. The optimal policy is the same irrespective of whether foreign capital inflows are allowed for unless capital markets are severely restricted.

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Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 314
Published Here
March 28, 2013