The Impact of Regulation on the Emergence of the Bubble
46 Pages Posted: 10 Jan 2010
Date Written: January 6, 2010
This paper considers the impact of regulation on the emergence of the bubble in economies. While the role in the recent crisis of the various actors - Banks, Governments, Regulators, Central banks and Rating agencies - and their failings are considered and some conclusions and recommendations drawn, it is argued that the behaviour of the system as a whole needs to be understood if bubbles are to be avoided. To this end, system dynamics modeling methodology is employed. Experimentation is carried out on three models of the economy. These models represent the economy in the absence of regulation, in the presence of regulation but in the absence of a reinforcing mindset and in the presence of regulation with a reinforcing mindset prevailing. It is demonstrated that the absence of regulation ensures the emergence of the bubble and that the presence of regulation together with a triggering mechanism to tighten monetary and fiscal policy can constrain the emergence of the bubble.
Keywords: Regulation, Bubbles, System Modeling
JEL Classification: G00
Suggested Citation: Suggested Citation