Repeatedly bubbles occur during times of “extended investments in infrastructure such as canals or railroads”(Charles P. Kindleberger, “Manias, Panics and Crashes“, p. 10) or around technological inventions that are made available for the general public such as cars, electricity, phone – lines and the internet. They go hand in hand with financial inventions, financial liberalization and excess leverage. Examples are, among many others, the Japanese Asset Price bubble of the late 1980ies and early 1990ies, the Dot-Com bubble 1997–2000, as well as the recent Financial Crisis 2007-2008. Frequently these bubbles are fueled by the overoptimistic outlook not only of the so-called experts or gurus but also by the extremely positive perception of the general public resulting in a “this – time – is - different – feeling”, “new – era – talks” or the “it –won’t happen – to – us – believe”(See for example Shiller, Kindleberger, Reinhart and Rogoff, Galbraith). Most of the time these bubbles are self – feeding processes. Business expansion leads to economic growth and greater income. Public spending increases which leads to the need of expanding production. Credit is needed for investment and during times of a boom it is easily made available. Often new financial instruments come into play as well as the deregulation of financial markets to meet the demand for credit. Businesses can expand further which results in ever increasing income and greater expectations about the future. Creditors become less risk averse and grant loans to individuals or firms that would have not met the necessary requirements before. People feel richer since their wealth is re – classified so that their assets and property are all of the sudden worth more for no realistic reason (renovate a home for example which would account for an increase in value). In combination with low interest rates, more and more investments and purchases are financed through excess leverage creating a vicious cycle of easy credit, money illusion and the adjustment of fundamental values. Great hikes in the markets are considered as a result of the new economy that has been created. Historical levels of the markets and where the level of fundamentals should really be are completely ignored. Currently we can only assess bubbles in retrospective, psychological factors which may help to explain the unexplainable are hardly considered in basic economic models.The only thing that is certain is that bubbles always burst.
Inhaltsverzeichnis (Table of Contents)
- 1 Introduction
- 2 The course of a typical speculative episode
- 2.1 Japan and the Lost Decade
- 2.2 Irrational exuberance in the US
- 3 Common theory and quantifiable facts
- 3.1 Efficient market hypothesis
- 3.2 Equilibria, bifurcations and chaos theory
- 3.3 Agent based financial market models
- 4 Structural factors triggering, amplifying and pricking economic bubbles a reality check
- 4.1 Bubble catalyst displacements
- 4.2 Magnifying mechanisms
- 4.2.1 Financial liberalization, the growth of credit, the quality of debt, supportive monetary and fiscal policy
- 4.2.2 Feedback loops, contagion and the role of the media
- 4.2.3 Rating Agencies
- 4.3 The big bang the other way around – the slowdown
- 5 Psychological factors triggering, amplifying and pricking economic bubbles - a reality check
- 5.1 Animal Spirits
- 5.1.1 Confidence
- 5.1.2 Fairness
- 5.1.3 Corruption
- 5.1.4 Money illusion
- 5.1.5 Stories
- 5.2 Bubble catalyst - psychological anchors for the markets that may trigger speculation
- 5.2.1 Quantitative anchors
- 5.2.2 Moral anchors
- 5.3 Magnifying mechanisms
- 5.3.1 Public attention to the markets and herding
- 5.3.2 New-era talk and short financial memory
- 5.3.3 Cultural changes
- 5.4 The big bang the other way around
- 6 Policy implications
- 6.1 Policy implications of a central bank
- 6.1.1 The "targeting long-run fundamentals" and "leaning against the wind" strategy
- 6.1.2 Reduced interest rates and the credit target
- 6.1.3 Other possible central bank measures
- 6.2 Policy implications of a government
- 6.2.1 The Tobin tax
- 6.2.2 Saving plans and retirement
- 6.2.3 Bretton Woods
- 6.3 Lender of last resort
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This master's thesis aims to investigate the causes and characteristics of recent economic bubbles, analyzing their cyclical nature and potential implications for economic policy. The work explores both structural and psychological factors contributing to the formation, escalation, and bursting of these bubbles. * The cyclical nature of speculative episodes in various markets. * The role of structural factors (financial liberalization, credit growth, monetary policy) in amplifying bubbles. * The influence of psychological factors (animal spirits, herd behavior, narratives) on market behavior. * Policy implications for central banks and governments in mitigating bubble formation and managing crises. * Theoretical models for explaining market movements beyond the efficient market hypothesis.Zusammenfassung der Kapitel (Chapter Summaries)
1 Introduction: This introductory chapter establishes the context of the study by highlighting the recurring nature of economic bubbles throughout history, particularly focusing on the increased frequency and magnitude of recent events. It emphasizes the inadequacy of rational explanations for these booms and busts, pointing towards the crucial role of both structural and psychological factors. The chapter introduces the structure of the thesis, outlining the content of subsequent sections. 2 The course of a typical speculative episode: This chapter provides an overview of the typical phases of a speculative bubble, using historical examples of the Japanese asset price bubble and the dot-com bubble to illustrate the key features. It highlights the commonalities between these events, emphasizing the rapid escalation and subsequent collapse, and the involvement of both stock and real estate markets. The chapter serves as a foundation for further analysis of the underlying causes of these phenomena. 3 Common theory and quantifiable facts: This chapter delves into the theoretical frameworks used to explain market movements. It discusses the limitations of the efficient market hypothesis, exploring alternative approaches such as equilibria, bifurcations, and chaos theory, as well as agent-based financial market models. The chapter lays the groundwork for the subsequent analysis by providing a critical assessment of existing theoretical tools and their suitability for understanding the complexity of speculative bubbles. 4 Structural factors triggering, amplifying and pricking economic bubbles a reality check: This chapter examines the structural factors contributing to the emergence and amplification of economic bubbles. It explores the role of financial liberalization, the expansion of credit, the quality of debt, and supportive monetary and fiscal policies in fueling speculative behavior. The chapter also investigates feedback loops, contagion effects, and the influence of rating agencies in shaping market dynamics. This section provides a detailed analysis of the interplay between economic and financial mechanisms that lead to bubble formation. 5 Psychological factors triggering, amplifying and pricking economic bubbles - a reality check: This chapter shifts focus to the psychological elements driving economic bubbles. It analyzes "animal spirits," exploring concepts such as confidence, fairness, corruption, money illusion, and the power of narratives in shaping collective market sentiment. This section investigates how psychological anchors, both quantitative and moral, can trigger speculation and how mechanisms like herding behavior, “new-era” narratives, and cultural changes amplify the bubble. 6 Policy implications: This chapter explores policy measures designed to mitigate the risk of economic bubbles and manage the consequences of their collapse. It analyzes policy implications for central banks, including strategies like "leaning against the wind" and adjustments to interest rates and credit targets. It further investigates potential government policies such as the Tobin tax, saving plans, and the role of international agreements like Bretton Woods. The chapter provides a critical evaluation of various interventions and their potential effectiveness.Schlüsselwörter (Keywords)
Economic bubbles, speculative episodes, financial markets, real estate markets, efficient market hypothesis, agent-based models, financial liberalization, credit growth, monetary policy, fiscal policy, psychological factors, animal spirits, herd behavior, market psychology, policy implications, central bank, government regulation.
Frequently Asked Questions: Comprehensive Language Preview of Economic Bubbles
What is the main topic of this document?
This document is a comprehensive preview of a master's thesis investigating the causes and characteristics of economic bubbles. It explores both structural and psychological factors contributing to their formation, escalation, and bursting, and analyzes their implications for economic policy.
What are the key themes explored in the thesis?
The key themes include the cyclical nature of speculative episodes, the role of structural factors (financial liberalization, credit growth, monetary policy) in amplifying bubbles, the influence of psychological factors (animal spirits, herd behavior, narratives), policy implications for central banks and governments, and theoretical models beyond the efficient market hypothesis.
What historical examples are used to illustrate economic bubbles?
The thesis uses the Japanese asset price bubble and the US dot-com bubble as examples to illustrate the typical phases and characteristics of speculative bubbles.
What theoretical frameworks are discussed?
The document discusses the limitations of the efficient market hypothesis and explores alternative approaches such as equilibria, bifurcations, chaos theory, and agent-based financial market models.
What structural factors are examined as contributors to economic bubbles?
Structural factors examined include financial liberalization, credit growth, debt quality, supportive monetary and fiscal policies, feedback loops, contagion effects, and the influence of rating agencies.
What psychological factors are analyzed?
Psychological factors include "animal spirits" (confidence, fairness, corruption, money illusion, narratives), psychological anchors (quantitative and moral), herding behavior, "new-era" narratives, and cultural changes.
What policy implications are discussed?
Policy implications discussed include central bank strategies ("leaning against the wind," interest rate adjustments, credit targets), government policies (Tobin tax, saving plans), and the role of international agreements like Bretton Woods.
What is the overall structure of the thesis?
The thesis is structured into six chapters: Introduction, The course of a typical speculative episode, Common theory and quantifiable facts, Structural factors triggering, amplifying and pricking economic bubbles, Psychological factors triggering, amplifying and pricking economic bubbles, and Policy implications. Each chapter is summarized in the preview.
What are the keywords associated with this thesis?
Keywords include economic bubbles, speculative episodes, financial markets, real estate markets, efficient market hypothesis, agent-based models, financial liberalization, credit growth, monetary policy, fiscal policy, psychological factors, animal spirits, herd behavior, market psychology, policy implications, central bank, and government regulation.
What is the intended audience for this document?
This document is intended for academic use, supporting the analysis of themes related to economic bubbles in a structured and professional manner.
- Quote paper
- Sophia Kuehnlenz (Author), 2013, Recent Economic Bubbles and Possible Implications for Economic Policy, Munich, GRIN Verlag, https://www.grin.com/document/264862
