Figure 8.12: Positive Feedback, Instability, and the Start of a Price Bubble
Figure 8.12 illustrates how positive feedback can amplify an initial price shock, leading to market instability. This process is characteristic of the beginning of an asset bubble, such as a runaway increase in house prices. The figure shows that both a price rise and a price fall can trigger self-reinforcing feedback loops that push the price further from its equilibrium (). This dynamic corresponds to an unstable equilibrium, represented graphically by a Price Dynamics Curve (PDC) that is steeper than the 45-degree line. Such a positive feedback process continues until a change in market expectations breaks the cycle.
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Figure 8.12: Positive Feedback, Instability, and the Start of a Price Bubble
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Figure 8.12: Positive Feedback, Instability, and the Start of a Price Bubble