Eric Doviak  Doviak.net 
Economics and Public Policy Analysis
 
Working Papers:
 
Income Inequality
 
Health Insurance
 
Ridge Regression
 
Forecasting the
New York State Economy
 
Asset Price Bubbles
 
 
For Students:
 
Graduate MACRO
 
DEVELOPMENT
 
TRADE
 
INTRO
 
intro lecture notes
 
MICRO
 
micro lecture notes
 
MACRO
 
macro lecture notes
 
 
Economic Links 
 
email me
  
Identifying and Responding to
Asset Price Bubbles
printer-friendly format
 
Download the Paper (PDF)
 
Download the Presentation (PDF)
 
This paper explores the question of whether financial regulatory institutions can identify an asset price bubble, such as the recent housing bubble. It concludes that bubbles can be relatively easy to identify.
 
Specifically, one can identify an asset price bubble when one observes:
  • asset-price growth that exceeds growth of the overall price level,
  • asset-price growth that exceeds income growth and
  • when the asset price growth is not matched by increasing scarcity of the asset.
This paper also shows that a long period of low real mortgage interest rates allowed the recent housing bubble to occur.
 
Future research should explore the question of how financial regulatory institutions should respond to a bubble once identified. Since low real mortgage interest rates were responsible for the bubble and the Federal Reserve was unwilling to act, bank regulators should have sought authority to restrict bank lending for home purchases and refinancing.
 
Had bank regulators had such authority and exercised it, real mortgage interest rates would have risen and the quantity of loans demanded would have shrunk, thus "popping the bubble."