Bridging between policymakers’ and economists’ views on bubbles

Abstract

In this article, I offer some thoughts on why there is such a gap between policymakers and researchers when it comes to asset bubbles. I argue that existing theoretical models of bubbles have yet to effectively address the questions that policymakers are most interested in. I go on to discuss how existing theories can potentially be used to address these questions in the future. The message I wish to convey is that even if policymakers find little in existing work on bubbles that can illuminate the questions they find important, there is scope for theoretical work on bubbles to either address these questions going forward or to convince policymakers that the answers it already does provide are useful. It should, therefore, be possible to bridge the gap between the theoretical literature on bubbles and the types of issues policymakers care most about. In what follows, I first describe the key questions that occupy policymakers who are concerned about the prospect of asset bubbles. I then discuss what the existing theoretical literature has to say about these key questions and how these models might eventually be used to shed light on the questions policymakers care most about.