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I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter,...
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including the making of bubbles and their subsequent crashes. In so doing, an elasticity is discovered in the market efficiency … mechanism due to the existence of agents anticipation. This elasticity is found to create spontaneous bubbles, which are … disclose a path to put an end to the bubble-crash phenomena, it is argued to be rationality not feasible …
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