Working Paper

The boy who cried bubble: public warnings against riding bubbles

Abstract: Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This paper examines the effects of public warnings using a simple model of riding bubbles. We show that public warnings against a bubble can stop it if investors believe that a warning is issued in a definite range of periods commencing around the starting period of the bubble. If a warning involves the possibility of being issued too early, regardless of the starting period of the bubble, it cannot stop the bubble immediately. Bubble duration can be shortened by a premature public warning, but lengthened if it is late. Our model suggests that governments need to lower the probability of spurious warnings.

JEL Classification: C72; D82; D84; E58; G12; G18;

https://doi.org/10.24149/gwp167

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2014-01-16

Number: 167

Note: Published as: Asako, Yasushi and Kozo Ueda (2014), "The Boy Who Cried Bubble: Public Warnings against Riding Bubbles," Economic Inquiry 52 (3): 1137-1152.