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.
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© 2010 Elias Karakitsos
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Karakitsos, E. (2010). Bubbles Lead to Long-term Instability. In: Fontana, G., McCombie, J., Sawyer, M. (eds) Macroeconomics, Finance and Money. Palgrave Macmillan, London. https://doi.org/10.1057/9780230285583_12
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DOI: https://doi.org/10.1057/9780230285583_12
Publisher Name: Palgrave Macmillan, London
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