Monetary policy can exacerbate or mitigate the effects of financial euphoria from "summary" of A Short History of Financial Euphoria by John Kenneth Galbraith
Monetary policy, the control of money supply and interest rates by a central bank, plays a crucial role in the dynamics of financial euphoria. When financial markets are experiencing a period of excessive optimism and speculation, monetary policy can either worsen or alleviate the situation. In times of financial euphoria, when asset prices are surging and investors are overly confident, central banks face a dilemma. On one hand, they may choose to tighten monetary policy by raising interest rates and reducing the money supply. This can help cool down the overheated markets and prevent the formation of asset bubbles. However, such a move can also trigger a sharp correction in asset prices and lead to a financial crisis. On the other hand, central banks may decide to keep monetary...
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