Monetary policy and asset price bubbles

Asset price bubbles represent unjustified prices of assets that are being constantly fed by buyers' and investors' expectations how the prices will still continue to grow and how they would in future earn money on that. The asset price bubbles represent an aftermath of informational alterations about intrinsic values, and since the new information is hardly predictable, neither can the change in asset prices be foreseeable. Holding to the efficient market hypothesis, it is unlikely that bubbles exist unless there are irrational behaviors or market rigidities. Normally, this optimistic expectations become suddenly crushed by unexpected changes in economic environment. While this mornings' investors and buyers are trying to figure out what is happening with their investments, all the money they have put in is incontinently becoming a huge unthinkable loss. The aggravating feature of asset price bubbles is that there is no proven way of predicting them, and they are recognized when collapse is starting to happening. Since financial crises are moving economy away from the desired balance with high output and are taking it the deteriorated balance where financial markets cannot perform well and the whole financial system tends to be paralyzed in the action of transfering funds to the parts of economy with the best investment opportunities, many eyes are centered on the role of the central banks and its monetary effects. Efficiently priced financial system is a required base for normal and vibrant capitalist economy, and thus the effects of interest rates have been discussed. The question is in what proportion and what exact way interest rates prove to be a precise instrument for dealing with asset price bubbles, since the problem is that for any significant movement in the interest rate against one bubble, might lead to greater risk of an economic breakdown by lowering the prices for assets that are not influenced by the bubble. Central bank have a very strong instrument in their hands that has an impact over the whole economy, and it is hard to have an focused monetary policy on only one desired part of the financial market. A lot of economists are proposing their own solutions on how to deal with this kind of bubbles. But neither ''monetary policy'' nor ''regulation'' teams are actually being in rightthe solution is hiding in between those two camps. In order to at least a little bit cut back the damage, one has to implement both monetary policy and regulation analystical prinicples