Bank of Japan paper shows popping bubbles may require volatile inflation


Optimal monetary policy in the presence of asset price bubbles may be tighter than previously thought, according to a working paper published today by the Bank of Japan.

In the paper, Monetary Policy and Inflation Dynamics in Asset Price Bubbles, author Daisuke Ikeda integrates an asset price bubble and firms' agency costs into a monetary dynamic stochastic general equilibrium model. The paper finds that an asset price bubble holds down inflation by loosening financial conditions and lowering

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