Bubbles and Central Banks: Historical Perspectives

Markus Brunnermeier and Isabel Schnabel

No 10528, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper reviews some of the most prominent asset price bubbles from the past 400 years and documents how central banks (or other institutions) reacted to those bubbles. The historical evidence suggests that the emergence of bubbles is often preceded or accompanied by an expansionary monetary policy, lending booms, capital inflows, and financial innovation or deregulation. We find that the severity of the economic crisis following the bursting of a bubble is less linked to the type of asset than to the financing of the bubble?crises are most severe when accompanied by a lending boom and high leverage of market players, and when financial institutions themselves are participating in the buying frenzy. Past experience also suggests that a purely passive ?cleaning up the mess? stance toward the buildup of bubbles is, in many cases, costly. Monetary policy and macroprudential measures that lean against inflating bubbles can and sometimes have helped deflate bubbles and mitigate the associated economic crises. However, the correct implementation of such proactive policy approaches remains fraught with difficulties.

Keywords: Bubbles; Capital flows; Credit; Macroprudential policy; Monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 F34 G01 N10 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-his, nep-ifn, nep-mac, nep-mon, nep-opm and nep-pke
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Citations: View citations in EconPapers (34)

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Working Paper: Bubbles and Central Banks: Historical Perspectives (2014)
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