We analyze optimal monetary policy and its implications for asset prices, when aggregate demand has inertia and responds to asset prices with a lag. If there is a negative output gap, the central bank optimally overshoots aggregate asset prices (asset prices are initially pushed above their...

In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely-lived households, under the hypothesis of spirit of capitalism. I consider heterogeneous households in terms of...

Why are asset prices so much more volatile and so often detached from their fundamental values? Why does the bursting of financial bubbles depress the real economy? This paper addresses these questions by constructing an infinite-horizon heterogeneous agent general equilibrium model with...

We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the...

This paper studies the importance of idiosyncratic endowment shocks for aggregate asset prices in continuous time. My generalized framework accommodates jumps and heterogeneous recursive preferences. I show that countercyclical cross-sectional risk is irrelevant to risk premia if and only if all...

We analyze optimal monetary policy and its implications for asset prices, when aggregate demand has inertia and responds to asset prices with a lag. If there is a negative output gap, the central bank optimally overshoots aggregate asset prices (asset prices are initially pushed above their...

Using a tractable New Keynesian model with heterogeneous agents, we analyze the interplay between households’ heterogeneity and rational bubbles, and their normative implications for monetary policy. Heterogeneity stems from idiosyncratic uncertainty related to participation in the asset and...