The Economic Journal · 2014 · 27 citations · 60 references
Social SciencesBusiness EconomicsEconomicsBankingFinancial EconomicsMicroeconomicsAsymmetric InformationCentral BankingCommercial BankingInformation AsymmetryInformation EconomicsMonetary PolicyAsymmetric Information ExchangeMarket Reaction To InformationRational Agents
The study examines anti‑bubble policy within a finite‑horizon greater‑fool bubble model featuring rational agents, asymmetric information, and short‑sale constraints. The authors use welfare‑economic tools to model bubble policies as central‑bank actions that deflate overpriced assets by revealing overpricing information, noting that inaction is interpreted as implicit endorsement and thus raises prices. The analysis shows that a central bank can deflate overpriced assets without an informational advantage, but without such an advantage a bubble‑bursting rule may worsen the situation.
Anti‐bubble policy is examined in a finite‐horizon 'greater fool' bubble model, with rational agents, asymmetric information and short‐sales constraints. This permits the use of standard tools of welfare economics to analyse bubble policies. Policy is modelled as deflating overpriced assets by revealing information about this overpricing. If the central bank is following such a policy, then the market interprets inaction as an implicit endorsement of asset prices, which raises these prices. Also, the central bank can deflate overpriced assets even if it has no informational advantage over any investors about this overpricing. However, unless it has such an informational advantage, a bubble‐bursting rule may only make things worse.
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RISK, UNCERTAINTY, AND DIVERGENCE OF OPINION
Edward M. Miller · The Journal of Finance · 1977 · 3.6K citations