Should
central banks intervene to burst asset price bubbles?
In this nine-minute video, Adam Posen of the MPC argues that central banks
should not intervene to prick booms as not all booms are followed by a
bust. In other words, central banks
cannot identify ex ante if a boom is an asset price bubble.
My colleague and former PhD student Gareth Campbell has created a website about the British Railway Mania - click here . This episode has been described by the Economist as probably the greatest bubble in human history. Gareth's website provides background on the Mania and posits some explanations for the 'bubble'. In his explanation of why the bubble happened, Gareth places a lot of emphasis on investor myopia regarding future dividends and uncalled capital. His study of investors during the episode does not support the view that this episode was fuelled by naive and irrational investors.