Publisher： Duncker & Humblot
E-ISSN： 2199-1235|49|4|507-514
ISSN： 2199-1227
Source： Credit and Capital Markets – Kredit und Kapital, Vol.49, Iss.4, 2016-12, pp. : 507-514
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Abstract
The recent debate about asset price bubbles and monetary policy in view of leaning against the wind is controversial in economic literature. In this paper we argue that depending on the circumstances there is space for the central bank to lean against financial imbalances. With an optimal bounded control problem in continuous time we have developed an augmented nonlinear Taylor Rule. The main advantage of our formulation is its much greater analytical tractability, which produces distinct results. Even under the assumption of nonlinearities the central bank is in a position to move the interest rate above a threshold value to provide financial stability.
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