Opinion is divided, however, on whether central banks should prevent asset bubbles through monetary policy action or through regulatory action. On one side, there is a purist view questioning the efficacy of resorting to monetary tightening to check speculative bubbles.
Opposed to this is the argument that a necessary condition for speculative excesses is abundant liquidity, and that controlling liquidity which is within the remit of monetary policy should be the first line of defence against “irrational exuberance”.