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Mitigating Bubbles and Crises

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Mitigating Bubbles and Crises
Mitigating Bubbles and Crises

A Written Report Presented to
Neil Angelo C. Halcon
College of Business, De La Salle University

In Partial Fulfillment of the Requirements in
Introduction to Macroeconomics
ECONTWO C31

By:
Dan Kervin Aquino
Celine Grace Chomi
Roxanne Alyssa Chua
Frances Therese Garay
Margaret Stefanie Arielle Gecana

March 26, 2014

Introduction What is an economic bubble? An economic bubble is an economic cycle characterized by rapid expansion followed by a contraction. It is a surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs and a theory that security prices rise above their true value and will continue to do so until prices go into free-fall and the bubble bursts. (Investopedia, n.d.) An economic bubble is also known as speculative bubble, market bubble, price bubble, financial bubble, etc. Where did the term “bubble” originate? The term “bubble” is used as a metaphor to indicate its sudden burst or quick eruption. Its abruptness is like a bubble bursting without any further ado, without a first and all at once. It will just burst all of a sudden. Its effects, though it is abrupt, are massive and alarming to the economy. This drastic change is not desirable to happen in any economy. There are many negative implications when a bubble occurs. In simpler definition, a bubble is caused by a wrong speculation, which results to vast changes in prices. When the sudden increase of inflation occurs that is when a bubble is formed. Since it is caused by a wrong speculation, and resulted to over inflation, the prices are not sustainable. Thus, it will soon be followed by a sudden crash in prices. What forms a bubble? Every economic bubble in history started with reckless expansion of money supply and credit, reckless manipulation of interest rates, or government promotions of "low-risk" something for


References: The Next Economic Bubble. (2013, August 27). Retrieved March 21, 2014, from http://www.foreignaffairs.com/articles/139871/william-h-janeway/the-next-economic-bubble Understanding Economic Bubbles Stock Market Bubble. (n.d.). Retrieved March 20, 2014 from http://en.wikipedia.org/wiki/Stock_market_bubble Wealth Effect Economic Bubble [Def. 1, 2, 3]. (n.d.). In Investopedia, Retrieved March 21, 2014, from http://www.investopedia.com/terms/b/bubble.asp Economic Bubble (n.d.) Fontinelle A. (2011, September 28). What Causes Bubbles?. Investopedia. Retrieved March 22, 2014 from http://www.investopedia.com/financial-edge/0911/what-causes-bubbles.aspx Fox Business Garber, Peter M. (1990). "Famous First Bubbles". The Journal of Economic Perspectives 4 (2): 35–54. doi:10.1257/jep.4.2.35 NIMA (2007, October 17) Subjectmoney. (2012, March 2). Financial Liberalization - What is the definition? - Financial Dictionary - Subjectmoney.com [Video file]. Retrieved from http://www.youtube.com/watch?v=kaF54Iqe5Mo Shedlock, M Initial Public Offering. (n.d.). Retrieved March 21, 2014 from http://en.wikipedia.org/wiki/Initial_public_offering Real Estate Bubble Economic Bubble [Def. 1]. (n.d.). In Business Dictionary, Retrieved March 21, 2014, from http://www.businessdictionary.com/definition/economic-bubble.html Stock Valuation Froot, Kenneth A.; Obstfeld, Maurice (1991). "Intrinsic Bubbles: The Case of Stock Prices". American Economic Review 81: 1189–1214. Topol, R. (n.d.). Bubbles and Volatility of Stock Prices: Effect of Mimetic Contagion. Ideas.repec.org. Retrieved March 21, 2014, from http://ideas.repec.org/a/ecj/econjl/v101y1991i407p786-800.html
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