Monetary Policy and Asset Price Bubbles in the DSGE model with an Agent-Based Financial Market
Abstract
We developed the approach in the macroeconomic literature, which is based on the synthesis of New Keynesian macroeconomics and agent-based models, and build a model allowing for the incorporation aof stochastic and realistic dynamics of financial markets, which is set by an agent-based model of a financial market, in the one of traditional New Keynesian frameworks - the financial accelerator model of Bernanke et al. (1999). Using our model we obtain a new evidence in the literature about how central banks should “prick” asset price bubbles for the maximization of social welfare and for the preserving of financial stability. The results show that pricking asset price bubbles can be a policy that enhances social welfare and reduces the volatility of output and inflation. The positive effect is larger in these cases, when asset price bubbles are caused by credit expansion, or when the central bank provides effective information policy.