This paper uses a risk-shifting model to analyze policy responses to asset price booms. We show
risk shifting leads to ine¢ cient asset and credit booms in which asset prices can exceed fundamentals.
However, the ine¢ ciencies associated with risk shifting arise independently of whether the asset is a
bubble. Given evidence of risk-shifting, policymakers may not need to determine if assets are bubbles to
justify intervention. We then show that some of the main candidate interventions against asset booms
have ambiguous welfare implications: Tighter monetary policy can mitigate some ine¢ ciencies but at a
cost, while leverage restrictions may raise asset prices and lead to more leveraged speculation rather than
less. Policy responses are more e§ective when they disproportionately discourage riskier investments.