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Keywords

asset bubbles; asset pricing; market efficiency; macroprudential policy

Abstract

In the aftermath of the global financial crisis, the issue of how best to identify speculative bubbles remains in flux. This owes to the difficulty of disentangling irrational investor exuberance from the rational response to lower risk, based on price behavior alone. In response, I introduce a two- pillar (price and quantity) approach for financial market surveillance. While asset pricing models comprise a valuable component of the surveillance toolkit, risk taking behavior, and financial vulnerabilities more generally, can also be reflected in subtler, non-price terms. Though policy makers will always encounter uncertainty when attempting to measure imbalances in financial markets, ‘perfect should not be the enemy of the good.’ In this spirit, the framework in this paper seems to capture some of the stylized facts of asset booms and busts, and thus could offer policy makers a practical guide as to when to consider leaning against the wind.

Acknowledgments

The author is grateful for feedback from colleagues at the International Monetary Fund, in particular Tamim Bayoumi, Olivier Blanchard, Luc Everaert, Gaston Gelos, Shuntaro Hara, Tommaso Mancini-Griffoli, and Miguel Savastano; and for comments from seminar participants at the University of California’s Center for Analytical Finance (Santa Cruz). The views expressed herein are those of the author alone and should not be attributed to the IMF, its Executive Board, or its management. The author has no conflicts to declare in support of the publication of this research.

First Page

90

Last Page

112

Page Count

23

Received Date

University of Warsaw

Revised Date

5 March 2016

Accept Date

15 July 2016

Online Available Date

29 July 2016

DOI

10.7172/2353-6845.jbfe.2016.2.5

JEL Code

E44; F37; G12; G15; G18

Publisher

29 July 2016

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