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Bubbles Lead to Long-term Instability

In: Macroeconomics, Finance and Money

Author

Listed:
  • Elias Karakitsos

Abstract

Excessive liquidity has financed a series of bubbles in the last ten years. Central banks have not tried to prevent bubbles from ballooning but have raised interest rates once inflation exceeds the target or there is persistent overheating, thereby pricking the bubble. Moreover, central banks have added liquidity every time a bubble has burst and cut interest rates to offset the deflationary gap. By doing so, the central bank has prevented the necessary de-leveraging and has perpetuated the excessive liquidity thus sowing the seeds for the next bubble. This explains how successive bubbles have been created and subsequently pricked. The house bubble is a transformation of the internet bubble and the commodities bubble a transformation of the house bubble. The story keeps repeating but, in every cycle, liquidity increases.

Suggested Citation

  • Elias Karakitsos, 2010. "Bubbles Lead to Long-term Instability," Palgrave Macmillan Books, in: Giuseppe Fontana & John McCombie & Malcolm Sawyer (ed.), Macroeconomics, Finance and Money, chapter 12, pages 179-195, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-28558-3_12
    DOI: 10.1057/9780230285583_12
    as

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