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Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View

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  • Gunther Schnabl
  • Andreas Hoffmann

Abstract

‘Capitalism without failure is like religion without sin’. Charles Kindleberger's book Manias, Panics and Crashes points out that speculation and crises have always been present: the world economic crisis of the 20th century, the South Sea bubble in the 18th century, and the tulip mania in the first part of the 17th century. Starting with the Japanese bubble in the 1980s we take the reader on a tour through 20 years of bubbles in emerging markets and industrial countries which have recently culminated in the 2007/08 US subprime market crisis. We explain the global stock market and real estate booms based on the real and monetary overinvestment theories of Hayek, Wicksell and Schumpeter, arguing that ample liquidity supply originating in the large industrialised countries has contributed – independent from the exchange rate regime – to overinvestment cycles in new and emerging markets around the globe. The policy implication is to keep interest rates not too low for too long in response to bursting bubbles.

Suggested Citation

  • Gunther Schnabl & Andreas Hoffmann, 2008. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View," The World Economy, Wiley Blackwell, vol. 31(9), pages 1226-1252, September.
    • Handle: RePEc:bla:worlde:v:31:y:2008:i:9:p:1226-1252
    DOI: 10.1111/j.1467-9701.2008.01126.x
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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