Virtual Macro Seminar: Gadi Barlevy, FRB Chicago

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Location: Zoom

"On Speculative Frenzies and Stabilization Policy"

Abstract: This paper examines whether tasking central banks with leaning 
against asset booms can conflict with their goals of stabilizing prices 
and output. The paper embeds the Harrison and Kreps (1978) model of 
speculative trade in a monetary model based on Rocheteau, Weil, and Wong 
(2018). I show that a disagreement shock which leads to a speculative 
asset boom also gives rise to a boom in output and to a lower price 
level as speculators hoard liquidity to buy assets in the future. As a 
result, central banks face a trilemma: they cannot use liquidity 
injections to simultaneously stabilize output, the price level, and 
asset prices when facing a speculative asset boom, and can stabilize at 
most two of the three. The model also offers some insights on factors 
that can drive low inflation.