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Natural Interest Rate and Asset Price Bubbles: How Bubbles Counteract Low Interest Rates

Author

Listed:
  • Jacopo Bonchi

    (Department of Social Sciences and Economics, Sapienza University of Rome)

Abstract
By developing a three-period OLG model with rational asset price bubbles and non-neutral monetary policy, I show how bubbles prevent low interest rates, when the natural rate of interest declines permanently. Bubbles push the natural interest rate up by serving as store of value (saving channel) and collateral (borrowing channel), and this avoids a long-lasting ZLB episode. Bubbles reallocate resources across generations too, and this reallocation implies welfare losses. These results shed light on the pattern of the US risk-free interest rates and on that of net worth and consumption across generations before the Great Recession.

Suggested Citation

  • Jacopo Bonchi, 2020. "Natural Interest Rate and Asset Price Bubbles: How Bubbles Counteract Low Interest Rates," Working Papers 3/20, Sapienza University of Rome, DISS.
    • Handle: RePEc:saq:wpaper:3/20
    as

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    File URL: http://www.diss.uniroma1.it/sites/default/files/allegati/DiSSE_Bonchi_wp3_2020.pdf
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    References listed on IDEAS

    as
    1. Bacchetta, Philippe & Benhima, Kenza & Kalantzis, Yannick, 2020. "Money and capital in a persistent liquidity trap," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 70-87.
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    4. Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2021. "Monetary Policy for a Bubbly World [Money and Capital in a Persistent Liquidity Trap]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(3), pages 1418-1456.
    5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66(6), pages 467-467.
    6. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    7. Gauti B. Eggertsson & Neil R. Mehrotra & Jacob A. Robbins, 2019. "A Model of Secular Stagnation: Theory and Quantitative Evaluation," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 1-48, January.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Asset price bubbles; Natural interest rate; Zero lower bound;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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