Monetary policy and asset price bubbles

undergraduate thesis

• Author: Ana Periša
• Mentor: Marijana Ivanov (mentor)
• Granter: University of Zagreb; Faculty of Economics and Business; (Department of Finance); Zagreb
• Defense date and country: 2015-09-24, Croatia
• Scientific / art field, discipline and subdiscipline: SOCIAL SCIENCES; Economics; Finance

Abstract

Asset price bubbles represent unjustified prices of assets that are being constantly
fed by buyers' and investors' expectations how the prices will still continue to grow and how
they would in future earn money on that. The asset price bubbles represent an aftermath of
informational alterations about intrinsic values, and since the new information is hardly
predictable, neither can the change in asset prices be foreseeable. Holding to the efficient
market hypothesis, it is unlikely that bubbles exist unless there are irrational behaviors or
market rigidities.
Normally, this optimistic expectations become suddenly crushed by unexpected
changes in economic environment. While this mornings' investors and buyers are trying to
figure out what is happening with their investments, all the money they have put in is
incontinently becoming a huge unthinkable loss. The aggravating feature of asset price
bubbles is that there is no proven way of predicting them, and they are recognized when
collapse is starting to happening.
Since financial crises are moving economy away from the desired balance with high
output and are taking it the deteriorated balance where financial markets cannot perform
well and the whole financial system tends to be paralyzed in the action of transfering funds
to the parts of economy with the best investment opportunities, many eyes are centered on
the role of the central banks and its monetary effects. Efficiently priced financial system is a
required base for normal and vibrant capitalist economy, and thus the effects of interest
rates have been discussed. The question is in what proportion and what exact way interest
rates prove to be a precise instrument for dealing with asset price bubbles, since the
problem is that for any significant movement in the interest rate against one bubble, might
lead to greater risk of an economic breakdown by lowering the prices for assets that are not
influenced by the bubble. Central bank have a very strong instrument in their hands that has
an impact over the whole economy, and it is hard to have an focused monetary policy on
only one desired part of the financial market.
A lot of economists are proposing their own solutions on how to deal with this kind of
bubbles. But neither ''monetary policy'' nor ''regulation'' teams are actually being in rightthe
solution is hiding in between those two camps. In order to at least a little bit cut back the
damage, one has to implement both monetary policy and regulation analystical prinicples.

• Keywords: financije; monetarna politika; imovina; cijena imovine; price bubble; economy bubble; lažna napuhanost cijene imovine
• Language: english
• URN:NBN: urn:nbn:hr:148:942312
• Study programme: Title: Business Economics in English; Study programme type: university; Study level: undergraduate; Academic / professional title: sveučilišni/a prvostupnik/ prvostupnica(baccalaureus/ baccalaurea) ekonomije (sveučilišni/a prvostupnik/ prvostupnica(baccalaureus/ baccalaurea) ekonomije)
• Type of resource: Text
• File origin: Born digital
• Access conditions: Access restricted to students and staff of home institution
• Public note: Sažetak preuzet iz Zaključka rada. Ključe riječi dodijelio knjižničar
• Created on: 2016-02-23 10:54:53