asset - price boom. if a run - up reflects a bubble, the ensuing price bust could obviously be viewed as its bursting. alternatively, asset prices may have been driven up by expectations of a productivity boom, which would lead to improved earnings. in that case, if the expected productivity boom does not subsequently materialize, asset prices will fall. the end result in this case would not be termed the bursting of a bubble. nonetheless, this case may be indistinguishable from such an experience : among other common elements, one could also see an investment overhang in the sector that saw its asset prices rise and subsequently fall. recessions are almost always accompanied by asset - price declines. but such declines sometimes appear to be the source of adverse surprises, and asset - price busts may subsequently have disproportionately adverse consequences. falling asset prices create a negative wealth effect and restrain consumption. by making collateral less valuable, they also increase the risk of lending to businesses and thereby worsen the lending terms faced by borrowers. when asset prices fall substantially, lenders may also find themselves holding substantial amounts of nonperforming loans that are backed by what may have become, in some cases, worthless collateral. for this reason, recessions that are preceded by asset - price booms and busts may also be associated with problems in the banking industry. in such episodes, the ensuing loss of intermediation may serve as an additional force acting to prolong and deepen what might otherwise have been a milder recession. concerns about the severity of downturns that follow significant asset - price collapses suggest that the identification and analysis of boom - bust asset - price cycles could be useful for policy. for that reason, i would next like to briefly review some of the issues associated with detecting asset - price bubbles. detecting bubbles the word bubble is sometimes employed to describe any quick and large increase in asset prices, but a more precise definition would associate bubbles with only those increases in asset prices that are not due to economic fundamentals. 4 under such a definition, a bubble is present when investors buy assets at prices above their fundamental values in the expectation of being able to sell them at even higher prices in the future. 5 to be sure, such departures from fundamentals may start small, but over time they could grow explosively. the fundamental price of an asset typically is defined in terms of the discounted present value of the income stream or equivalent services that the asset is

in the u. s. economy in this sample. for japan, one can see the remarkable run - up of the 1980s and its agonizing reversal during the 1990s. for the united kingdom, one may notice the asset - price boombust cycle of the early 1970s followed by the painful recession beginning in 1974. indeed, these three episodes stand out as perhaps the clearest suggestions of an asset - price boom - bust cycle significantly influencing or possibly triggering a subsequent recession and recovery. how do these three cyclical turning points compare with other recessions? to be sure, such a comparison rests on ( 1 ) our identification of these three episodes as the ones that appear to have been preceded by significant asset - price booms and busts and ( 2 ) separating these recessions from the rest. such a classification necessarily involves some element of ambiguity, but the three episodes highlighted in figure 1, the u. s. recession in 2001, the japanese recession in 1992, and the u. k. recession in 1974, do appear to stand out. 12 estimates of real gross domestic product ( gdp ), the output gap, potential output, and real investment are from the economic outlook database of the organisation for economic co - operation and development. the investment data ( shown in later displays ) reflect total fixed investment. in figure 1, both actual and potential output are expressed relative to the value of actual real gdp in 1985. by definition, output should equal the economy ’ s potential - and the corresponding measure of the output gap should equal zero - when productive factors in the economy are employed at their normal levels. output is below the economy ’ s potential when resources are underutilized and above it when the economy is overheated. to be sure, assessing the economy ’ s potential with much accuracy is inherently difficult, and historical estimates of the implicit output gap are highly imprecise ; however, these measures can serve as helpful summary indicators in historical comparisons such as those discussed below. there are at least two reasons for the ambiguity in such classifications. the first relates to how one defines an asset - price bust. the second relates to the dating of cyclical peaks, which, as noted earlier, may differ somewhat depending on the methodology underlying business cycle chronologies. the three episodes on which i concentrate my attention are relatively uncontroversial in that the recessions followed rather substantial asset - price boom - bust cycles. but other recessions, which followed milder boom - bust cycles, could