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Inflation, asset markets, and economic stabilization: lessons from Asia

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Author Info
Lynn Elaine Browne
Rebecca Hellerstein
Jane Sneddon Little

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Abstract

In 1980's, a new convention emerged in the economics profession - that central banks' primary, even sole, responsibility should be controlling consumer price inflation. By the 1990's, this view was gaining credibility in policy circles, and various countries mandated that their central banks make inflation their primary focus (generally with and escape clause in the event of a severe economic shock). Here in the United States, this orthodoxy never gained official status; rather, the U.S. policy goal remains promoting stable long-term growth using a variety of theoretical approaches. ; The recent problems in East Asia, as well as earlier difficulties in Japan, raise the question of whether such a concentrated focus on inflation became tunnel vision. Drawing on the crises in Japan and other Asian countries, with reference to comparable episodes in the United States, this article suggests that a preoccupation with inflation may have lulled policymakers and investors into ignoring useful signals from stock, real estate, and currency markets and from emerging imbalances in the real economy. Whether such imbalances would have been better addressed by monetary policy, or by improved disclosure, supervisory intervention, or tax policy, a broader perspective might have identified problems in Asia before they assumed such crippling proportions. ; This article concludes by suggesting that policymakers may want to look for signs of overheating emanating from asset markets and from emerging imbalances in the real economy, even when consumer prices are well behaved. Signs that high levels of debt may be financing increasingly optimistic investments warrant particular concern. The article also stresses the vulnerabilities that newly liberalized financial markets may introduce and the importance of measures that encourage the private sector to price risk more accurately and force it to bear the costs of international financial crises more fully. Overall, it advocates an eclectic approach to assessing economic performance.

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Publisher Info
Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1998)
Issue (Month): Sep ()
Pages: 3-32
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Handle: RePEc:fip:fedbne:y:1998:i:sep:p:3-32

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Related research
Keywords: Economic stabilization ; Monetary policy ; Asia ; Inflation (Finance) ; Financial markets;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jeffrey A. Frankel., 1993. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," Center for International and Development Economics Research (CIDER) Working Papers C93-024, University of California at Berkeley.
    Other versions:
  2. Stanley Fischer, 1996. "Why are central banks pursuing long-run price stability?," Proceedings, Federal Reserve Bank of Kansas City, pages 7-34. [Downloadable!]
  3. Lynn Elaine Browne & Rebecca Hellerstein, 1997. "Are we investing too little?," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 29-50. [Downloadable!]
  4. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Takatoshi Ito & Tokuo Iwaisako, 1995. "Explaining Asset Bubbles in Japan," NBER Working Papers 5358, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. José Viñals & Charles Goodhart, 1994. "Strategy and Tactics of Monetary Policy: Examples from Europe and the Antipodes," FMG Special Papers sp61, Financial Markets Group. [Downloadable!] (restricted)
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  8. Menzie D. Chinn, 1998. "Before the Fall: Were East Asian Currencies Overvalued?," NBER Working Papers 6491, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Woo, W.T. & Hirayama, K., 1995. "Monetary Autonomy in the Presence of Capital Flows: And Never the Twain Shall Meet, Except in Asia?," Department of Economics 95-17, California Davis - Department of Economics.
    Other versions:
  10. J.A. Kregel, 1998. "East Asia Is Not Mexico: The Difference between Balance of Payments Crises and Debt Deflations," Macroeconomics 9805020, EconWPA. [Downloadable!]
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    Other versions:
  17. Lynn E. Browne, 1992. "Why New England went the way of Texas rather than California," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 23-41.
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    Other versions:
  20. Wing Thye Woo & Kenjiro Hirayama, 1996. "Monetary Autonomy in the Presence of Capital Flows: And Never the Twain Shall Meet, Except in East Asia?," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 307-333 National Bureau of Economic Research, Inc. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lynn Elaine Browne, 1999. "U.S economic performance: good fortune, bubble, or new era?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-20. [Downloadable!]
  2. Lynn Elaine Browne, 2000. "National and regional housing patterns," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 31-57. [Downloadable!]
  3. Jane Sneddon Little & Giovanni P. Olivei, 1999. "Why the interest in reforming the International Monetary System?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 53-84. [Downloadable!]
  4. Lynn Elaine Browne, 2001. "Does Japan offer any lessons for the United States?," New England Economic Review, Federal Reserve Bank of Boston, pages 3-18. [Downloadable!]
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