Bubbles Lead to Long-term Instability

Elias Karakitsos

Chapter 12 in Macroeconomics, Finance and Money, 2010, pp 179-195 from Palgrave Macmillan

Abstract: Abstract Excessive liquidity has financed a series of bubbles in the last ten years. Central banks have not tried to prevent bubbles from ballooning but have raised interest rates once inflation exceeds the target or there is persistent overheating, thereby pricking the bubble. Moreover, central banks have added liquidity every time a bubble has burst and cut interest rates to offset the deflationary gap. By doing so, the central bank has prevented the necessary de-leveraging and has perpetuated the excessive liquidity thus sowing the seeds for the next bubble. This explains how successive bubbles have been created and subsequently pricked. The house bubble is a transformation of the internet bubble and the commodities bubble a transformation of the house bubble. The story keeps repeating but, in every cycle, liquidity increases.

Keywords: Interest Rate; Monetary Policy; Central Bank; House Price; Credit Risk (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-28558-3_12

Ordering information: This item can be ordered from
http://www.palgrave.com/9780230285583

DOI: 10.1057/9780230285583_12

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().