By William Curt Hunter, George G. Kaufman, Michael Pomerleano
In either the industrialized and constructing worlds, a particular function of the final 20 years has been lengthy buildups and sharp collapses in asset markets equivalent to inventory, housing, and trade markets. The volatility has sparked excessive debate in educational and coverage circles over the perfect financial and regulatory reaction to dramatic marketplace shifts.This booklet examines asset rate bubbles to extra our realizing of the motives and implications of monetary instability, targeting the possibility of important banks and regulatory firms to hinder it. The publication grew out of a convention together backed through the Federal Reserve financial institution of Chicago and the realm financial institution workforce in April 2002.
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Additional resources for Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies
Stock prices in 1929 and 1999 is often described in a similar way. A loose definition is a rise in the price of an asset or asset class that generates additional increases, a rapid upward price movement based on exaggerated beliefs about the potentials of a new technology or organizational structure to generate earnings. The rise is followed by a collapse. Examples from the pricing of many technology stocks in 2000 are familiar. Everyone can provide an example of rising share prices for companies without earnings, and in some cases without prospect of earnings for three to five years or longer.
First, changes in interest rate modify people’s expectations about future economic growth, and, thus, their profit expectations. Second, monetary policy decisions may change the set of discount factors economic agents apply to their profit expectations or to the future stream of services or revenues from the asset they hold (housing, for instance). Finally, interest rate changes may induce portfolio shifts amongst assets that may, in turn, affect their relative prices. Besides this, and for the sake of simplicity I will call it the “interest rate channel,” changes in asset prices also generate wealth effects that may have a significant impact on several components of aggregate demand, namely consumption and investment.
In Allen and Gale, for example, the project manager, acting as an agent of bank investors, has unobserved information and takes an unobserved action that affects investors’ returns. In the current policy environment, the agency problem is exacerbated because of uncertainty about valuations due to well-publicized problems with accounting standards. If banks lack trust in the accuracy of the accounting standards, then the agency problem grows. So, the clear policy lesson to be drawn from this literature is the importance of improving transparency.