Our results are as follows. We find that - within the confines of the set of models we consider - it is hard to account for a boom-bust episode (an episode in which consumption, investment, output, employment and the stock market all rise sharply and then crash) in a model that abstracts from nominal frictions. However, when we introduce an inflation targeting central bank and sticky nominal wages, a theory of boom-busts emerges naturally. In our environment, inflation targeting suboptimally converts what would otherwise be a small economic fluctuation into a major boom- bust episode. In this sense, our analysis is consistent with the view that boom-bust episodes.
