Development Of The Theory Of Asset Price Bubbles And Monetary Policy

The debate between Bernanke and Gertler (1999) and Cecchetti, Genberg, Lipsky, and Wadhwani (2000) concerning the monetary policy under asset price boom-bust is originated from the flaws in contemporary mainstream theory of monetary policy. After reviewing and reorganizing the development of the theory of monetary economics, especially the theory of monetary policy, in the past 2-3 decades, the weaknesses and errors of the mainstream theory, in both the target(s) and instrument(s) of monetary policy, are pointed out. Furthermore, with the scrutiny of the impact of bubbles on money and output, including the invalidity of interest rate and the change of financial system in worsening the depression, a new framework of monetary policy theory, that is, the dual system, is developed. Subsequently, a new suggestion of monetary policy implementation under bubbles, which is basically different from those of BG (1999) and CGLW (2000), is put forward.