Bubbles, crises, and policy

In many recent cases financial liberalization has led to a bubble in asset prices. The bursting of the bubble results in a banking crisis and recessio n. It is suggested such bubbles are caused by an interaction of the risk-sh ifting problem arising from agency relationships in intermediaries and unce rtainty concerning the expansion of credit. Two important policy objectives are identified. The first is the prevention of bubbles in asset prices. Th e second is minimizing the impact of spillovers on to the real economy duri ng post-bubble banking crises. The different policy approaches taken in Nor way and Japan are compared.