Kohn, Donald

Nonetheless, even if policymakers are confident that a bubble has emerged, the question of the timeliness of the call remains.  The essential problem is the timing of the detection of the bubble relative to the timing of its collapse.  The risk is that the detection and subsequent policy response occurs not long before the bubble collapses on its own.  Given the lags associated with monetary policy, the resulting contractionary effects on the economy of the monetary tightening would occur just when the adverse effects of the bubble's collapse are being realized, worsening rather than mitigating the effects of the bubble's collapse.  And the inevitable lags in detecting bubbles increases the likelihood that, by the time action is taken, speculative activity will have progressed to the point that its collapse is not far off.