| Abstract |
We explore the existence of endogenous fluctuations with a rational bubble and the
stabilizing role of fiscal and monetary policies. Consumers' credit constraints, the role of
collateral and a portfolio choice are the key ingredients of our analysis. We consider an
overlapping generations model where households realize a portfolio choice between three assets with
different returns (capital, money and bonds). Expectation-‐driven fluctuations and the
multiplicity of steady states occur under a positive bubble on bonds, gross substitutability and
large input substitution because of credit market imperfections. Focusing on the stabilizing role
of policies, we show that a progressive taxation on capital income may rule out
expectation-‐driven fluctuations and the multiplicity of steady states.
In contrast, a monetary policy under a Taylor rule has a mitigated stabilizing role, depending on
the reactiveness of the policy rule and the concavity of the utility function. When the monetary
authority decides instead to fix the nominal interest rate regardless the inflation, decreasing the
level of the nominal interest rate can rule out expectation-‐ driven fluctuations, restore the
uniqueness of steady states, but can damage the welfare
at the steady state.
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