The International Comparison Of Causes Of Asset Price Bubble

The essay is intended to deeply study the asset price bubbles existing in 2007 in China, Japan bubble economy in the late 1980s and American sub-prime crisis beginning from 2007 from the view of market failure and government failure. Through the research of this problem, we can thoroughly realize the effects of market failure and government failure in the forming of asset bubbles, especially in China. This will help us to understand asset price bubble which has been in China, and it is important to protect China from and deal with asset price bubble in the future.The first chapter gives the definitions of asset and asset price bubble, introduces the theories of asset price bubble. They can be divided to three schools: theory held by Keynesian economists and proponents of Behavioral Finance, theory held by Austrian school economists, theory held by Rational expectation school economists and proponents of Supply-Side economics. The second chapter discusses the mechanism of asset price bubble caused by market failure and government failure. Complete competitive market is the sufficient and necessary condition for the lack of asset price bubble, so the market failure is one of factor leading to asset price bubble. Market failure includes incomplete and asymmetric information, public goods, externality and incomplete competition market. If we definite asset price bubble as successive rising of asset price, then the cause of it is that excessive money flows into asset market. So examining the characters of financial market is the key to understanding the forming of asset price bubble. The share market is internal part of financial market, because the asset price bubble is caused by too much money flowing into housing market, so housing bubble is compactly related to financial market. This part especially pointed the market failures leading to asset price bubble existing in financial market, which includes monitoring as a pubic good, the externality of bankrupt of financial institution, government insurance and adverse selection, rating as a pubic good, asymmetric among investors. Government failure is another factor leading to asset price bubble. The mistake of public policy, the intrinsic defect of government regime, the inefficient of government institution and securing rent all can cause government failure. The government failures existing in financial market include policies likely leading to asset price bubble, expansionary monetary policy, the insufficient monitoring of financial markets, financial institutions and financial products, the excessive interference with financial markets, which lead to asset price bubble. The third chapter exhibits the asset price bubble existing in China, Japan and U.S.A., discuss how the market failure and government failure lead to asset price bubble in three countries respectively. Then compare the causes and find common and different ones in three countries. The common causes are incomplete and asymmetric information, expansionary monetary policy, the sticky strategy which can not comply with changing economic circumstances, the lack of moderate monitoring of financial markets. The different ones include: Because China is experiencing the transition from p}an regime to market regime, the market failure and government failure are playing the equivalent role in forming the asset price bubble. The development of economy in Japan was mainly guided by government, so the government failure was the main cause of asset price bubble, which can be said that the government failure leads to market failure. Free market belief dominates the U.S.A market economy, so market failure plays the key role in forming the asset price bubble, it is appropriate to say that the market failure leads to government failure. The fourth chapter gives the measures to decrease the extent of asset bubbles.With the increasing of household wealth in China, the transition of wealth to asset is more and more apparent, and the asset price bubble will be a long existing phenomenon. Thus, we must insist correct direction in prohibiting asset price bubble, not only sufficiently use the market mechanism in allocating resources, but also use government policy to supplement market failure. We must insist principle of moderation and prevent the government failure because of excess government intervention in making policies.