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Benjamin Eden
''Does a low interest rate support private bubbles?''
I examine the argument that a low interest rate policy can lead to “overvalued” private assets or privately created bubbles (private bubbles). Using the standard approach to bubbles, I find that a policy of a low real interest rate may support private bubbles but a policy of a low nominal interest rate may actually reduce the importance of private bubbles. I then attempt a less conventional way of modeling bubbles focusing on the supply of private bubbles. The paper uses results from the Friedman rule literature, the fiscal approach to the price level and the literature on rational bubbles.
Keywords: Interest Rate Policy, The Friedman Rule, The Fiscal Approach to Bubbles.
JEL: E4 - Money and Interest Rates: General
Manuscript Received : Oct 10 2012 Manuscript Accepted : Oct 31 2012

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