Financial Instability and Speculative Bubbles: Behavioural Insights and Policy Implications

Abstract

Michelle Baddeley in this chapter entitled, ‘Financial Instability and Speculative Bubbles: Behavioural Insights and Policy Implications’, draws on themes from Baddeley and McCombie’s (An historical perspective on speculative bubbles and financial crises: Tulipmania and the South Sea bubble. In: Arestis P, Baddeley M, McCombie JSL (eds) What global economic crisis? Palgrave Macmillan, Basingstoke, 2001) exploration of speculative bubbles, which applied different models of speculation to analysing famous historical speculative episodes, specifically Tulipmania and the South Sea Bubble. This chapter re-assesses these insights in the light of all that has happened during the US sub-prime mortgage crisis and subsequent global financial crises of 2007/2008. It also extends the analysis to include new insights from behavioural finance about the nature and causes of speculative bubbles, blending insights from behavioural finance and post-Keynesian economics. Speculative bubbles throughout history have a number of common, predictable features so why have we not learnt more from these past experiences? In answering these questions, this chapter concludes with an analysis of policy implications—including fiscal and monetary measures that could be implemented to minimise the destabilising real-side impacts from speculative bubbles and the financial shocks and crises which often follow.