How to view asset bubbles? -Part 5

Si Gyeongmin

Nov 02, 2021

Although the relative merits of these two methods were actively discussed before the financial crisis, most policymakers tended to take a wait-and-see attitude. This may be partly due to the boom and bust of technology stocks in the United States in the late 1990s, a period commonly referred to as the internet bubble. As the stock prices of companies specializing in information technology soared, the Fed did not respond to raising interest rates. The Fed chairman at the time did publicly question how policymakers knew whether high asset valuations were driven by irrational prosperity. These remarks attracted considerable attention at the time and were widely interpreted as concerns about rising stock prices. The Fed has not issued any tendency to use interest rate policy to deal with potential bubbles. After the price of technology stocks plummeted and economic activity began to shrink, the Fed began to cut interest rates aggressively. Many people believe that the 2001 recession was quite mild. This fact proves that the wait-and-see approach can work well in practice, and waiting for intervention can still effectively limit the impact of asset price collapses.

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