Over the centuries, economies across numerous nations have periodically been subject to asset price bubbles. An asset price bubble is a  Dating back to the Dutch tulip mania bubble of the early 17th century, speculation drove the value of tulip bulbs to extremes where the rarest tulip bulbs traded for as much as six times the average person’s annual salary. The most recent asset bubble occurred in the 2000s where U.S. prices for housing began to rise, peaked in 2006, and then sharply declined and continued to drop, until prices hit their lowest point in 2012. This large decline in U.S. home prices led to mortgage delinquencies, foreclosures, as well as implications beyond real estate as it contributed to the recession and a global financial crisis. Some asset price bubbles of the past few decades include the U.S. tech stock market bubble of the late 1990s, the Japanese real estate and stock market bubbles of the 1980s, and the gold market bubble of the 1970s.phenomenon characterized by surges in prices to levels significantly above the fundamental value of that .
Given the common occurrence of asset price bubbles around the world and the severe consequences it plays on a nations market and economy. It is surely no surprise that there have been calls for policymakers to prevent future asset price bubbles through the better exercise of monetary policy and financial regulatory policy. Financial law and legal change play critical roles in the severity and consequences of bubbles. As bubbles and busts have littered the financial landscape for centuries, the devastating impact of the global financial crisis has ignited a vigorous policy debate over how best to address periods of excessive frenzy in asset markets. A consensus between macroeconomists analyzing the inherent uncertainty of this determination has led to arguments against the use of financial regulation and monetary policy to curb inflation in financial markets. The reason for this is that bubbles are easy to identify after they occurred but much harder to identify beforehand. In result, efforts to address bubbles beforehand run the severe risk of suppressing efficient and productive price changes.
When determining how central banks should respond to asset prices that occur during a bubble, we need to first consider the objectives of monetary policy. The objective of a central bank is to promote the public good through policies that foster economic prosperity. Through research conducted on monetary economics a government could achieve this objective by stabilizing both inflation and economic activity. As asset price bubbles can be hard to identify, tightening monetary policy to restrain a bubble that has been misidentified can lead to weaker economic growth. Even if asset price bubbles could be identified, the effect of interest rates on asset price bubbles is highly uncertain. This is due to the fact that usual tools of monetary policy will not be effective in unusual conditions. One must also keep in mind that there are many asset prices, and at any one time a bubble may be present in only a fraction of assets. Therefore, monetary policy actions would be likely to affect asset prices in general, rather than solely those in a bubble.
One example would be Japan’s experience of the asset price boom during the Lost Decade which emphasized not employing preemptive monetary policy actions to deflate a bubble. Japan’s asset price boom occurred because in Tokyo the land surrounding the Imperial Palace was estimated to be worth more than the whole of California at the time. The 1980s was a prosperous decade in Japan. However, after the bursting of the bubble, policymakers did not quickly resolve the fragility of the banking sector, thereby allowing conditions to worsen as banks kept lending to inefficient and debt-ridden companies. Japan’s experience does not support the need for preemptive monetary policy actions to deflate a bubble, because the tightening of monetary policy during the bubble period was not efficient in leading to better economic outcomes. Research suggests that it was the slow response of monetary policy to the deterioration in the economic outlook and fall in inflation following the bursting of the bubble that contributed to the onset of deflation.
Asset price bubbles are a common economic occurrence that could plague any country. Monetary policy should not try to prick possible asset price bubbles, even when they are of the variety that can contribute to financial instability. Central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good. Instead, monetary policy should react to asset price bubbles by looking to the effects of asset prices on employment and inflation, then adjusting policy as required to achieve maximum sustainable employment and price stability. This monetary policy response should be ample to prevent adverse effects of some types of asset price bubbles.
 Erik F. Gerding, Law, Bubbles and Financial Regulation, 1-2 (Routledge 2013); see also Economic Bubble, Nasdaq, https://www.nasdaq.com/glossary/e/economic-bubble (last visited Mar. 31, 2023).
 Adam Hayes, Tulipmania: About the Dutch Tulip Bulb Market Bubble, Investopedia, https://www.investopedia.com/terms/d/dutch_tulip_bulb_market_bubble.asp (last updated Nov. 22, 2022).
 Ellen Terrell, Business Booms, Busts, & Bubbles: A Resource Guide on Economic Manias & Crashes, Library of Congress, https://guides.loc.gov/business-booms-busts/dot-com-real-estate (last updated Jan. 11, 2022).
 Lawrence White, Preventing Bubbles: What Role for Financial Regulation?, Cato Journal, Vol. 31, No. 3, 604 (Fall 2011).
 Id. at 603.
 Brad Jones, Asset Bubbles: Re-thinking Policy for the Age of Asset Management (Int’l Monetary Fund, Working Paper No. 15/27, 2015).
 White, supra note 5, at 603.
 Frederic Mishkin, How Should We Respond to Asset Price Bubbles?, Fed. Reserve Bd. (May 15, 2008), https://www.federalreserve.gov/newsevents/speech/mishkin20080515a.htm.
 Robert Cutts, Power from the Ground Up: Japan’s Land Bubble, Harvard Business Review (May-Jun. 1990), https://hbr.org/1990/05/power-from-the-ground-up-japans-land-bubble; see also Douglas Parkes, Japan in the 1980s: when Tokyo’s Imperial Palace was worth more than California and golf club membership could cost US$3 million – 5 crazy facts about the bubble economy, Style (Jul. 1, 2020), https://www.scmp.com/magazines/style/news-trends/article/3091222/japan-1980s-when-tokyos-imperial-palace-was-worth-more.
 Mishkin, supra note 9.