This paper first discusses the major characteristics
of the seeding stage, the development stage and the final stage of an asset
bubble. In particular, it emphasizes the role of expectation, some major
changes in economic behaviors, financial leveraging, some important vicious
cycles, upward spirals and herding behavior in the eventual development of an
asset bubble. Thereafter, it discusses the policy implications of such an
analysis. The second half of the paper extends the discussion to some important
changes in economic behaviors, financial deleveraging, vicious cycles and
downward spirals that would push an early-developed financial crisis into a
full-blown economic crisis. Based on the characteristics and the experience of
some major financial crises in the past few decades, the paper discusses policy
measures that could be adopted during the crisis period and the post-crisis
recession.
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