Economic policies are known to have different effects on the economy depending on the size of policy changes and on business cycle conditions. For example, monetary policy might be more stimulative in recessions and around turning points in the business cycle than during expansions. Such...

Should central banks respond to asset price bubbles? This paper explores this monetary policy question in a hypothetical economy subject to asset price bubbles. Despite the highly stylized structure of the model, the results reveal several practical monetary policy lessons. First, a monetary...