And in all instances the flip-side of financial exuberance is an increased risk of regular, and potentially violent, reversals 3 – a pattern we have seen repeatedly in history, going back at least to the Dutch Tulip Mania in 1636. 4 Hence, for policymakers concerned with financial stability, financial cycles present two related questions.
First, how should they identify when it is justified to intervene in the cycle? And second, if intervention is justified, which policy domain should act? Criteria for policy intervention A key criterion to identify the case for pre-emptive policy intervention is the presence of systemic negative externalities.