Empirical evidence points to moderate inflation during stock market booms. To explain it and study optimal monetary policy in such a situation, this paper develops a dynamic model with rational bubbles and nominal rigidities. The model features a financial cost channel through which the shadow...

We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two large open economies. We establish a reinforcing relationship between global imbalances and bubbles. Capital flows from South to North facilitate the emergence and the size of...

We develop a growth model with credit-fueled speculative asset bubbles. In our model, financial intermediaries (banks) use borrowed money to speculate on a risky asset bubble, which promises high returns as long as the bubble does not collapse. However, with limited liability, banks can default...