The Hazards of Propping Up: Bubbles and Chaos
The International Journal of Business and Finance Research, Vol. 3, No. 2, pp. 83-93, 2009
11 Pages Posted: 12 Oct 2008 Last revised: 30 Jan 2010
Date Written: February 18, 2009
In the current environment of financial distress, many governments are likely to soon become major holders of financial assets, but the policy debate focuses only on the likelihood and extent of short-term market stabilization. This paper shows that government intervention and propping up are likely to lead to long-term bubbles and even wildly chaotic behavior. The discontinuities occur when the committed capital reaches a critical amount that depends on just two parameters: the market impact of trading and the target exposure percentage.
Keywords: bubbles, bailout, government, propping up, intervention
JEL Classification: G28, G11, G12, G13
Suggested Citation: Suggested Citation