The boy who cried bubble: public warnings against riding bubbles
Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This paper examines the effects of public warnings using a simple model of riding bubbles. We show that public warnings against a bubble can stop it if investors believe that a warning is issued in a definite range of periods commencing around the starting period of the bubble. If a warning involves the possibility of being issued too early, regardless of the starting period of the bubble, it cannot stop the bubble immediately. Bubble duration can be shortened by a premature public warning, but lengthened if it is late. Our model suggests that governments need to lower the probability of spurious warnings.
The text is part of a series Globalization and Monetary Policy Institute Working Paper Number 167 44 pages
Classification:
C72 - Noncooperative Games ; D82 - Asymmetric and Private Information ; D84 - Expectations; Speculations ; E58 - Central Banks and Their Policies ; G12 - Asset Pricing ; G18 - Government Policy and Regulation