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It Takes More Than a Bubble to Become Japan

In: Asset Prices and Monetary Policy

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  • Adam Posen

    (Institute for International Economics)

Abstract

Did monetary easing in the 1980s cause Japan's bubble, as is often suggested? Drawing on both a new cross-national consideration of the monetary policy-asset price linkage and a reexamination of what actually occurred in Japan during 1985-90, I conclude that the bubble was just as likely to occur, whatever monetary policy within reason would have done. Did the bubble's bursting cause Japan's Great Recession? In fact, Japan's recession of 1990-94 was mild, and only a combination of policy mistakes turned this normal recession into extended stagnation. This is borne out by cross-national investigation suggesting that the frequency of extended downturns following asset booms is relatively low. Comparing the post-bubble response of the US and Japanese economies, did the bubble itself impede restructuring? Given very different responses in the two economies to similar bubbles, a bubble itself is not sufficient to cause real-side disruption. Central bankers should learn from Japan's bubble the benefits of a more thoughtful approach to assessing potential growth and of easing rapidly in the face of asset price declines and not be concerned with targeting asset prices or pricking bubbles per se.
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Suggested Citation

  • Adam Posen, 2003. "It Takes More Than a Bubble to Become Japan," RBA Annual Conference Volume,in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  • Handle: RePEc:rba:rbaacv:acv2003-12
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    File URL: http://www.rba.gov.au/publications/confs/2003/pdf/posen.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Markus K. Brunnermeier & Isabel Schnabel, 2014. "Bubbles and Central Banks: Historical Perspectives," Working Papers 1411, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 31 Oct 2014.
    2. Fernando Alexandre & Pedro Bação, 2005. "Monetary policy and asset prices: the investment channel," NIPE Working Papers 3/2005, NIPE - Universidade do Minho.
    3. Mishkin, Frederic S., 2017. "Rethinking monetary policy after the crisis," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 252-274.
    4. Canares, Michael, 2009. "Macro-economic trends and their impacts on forests and forestry in Asia and the Pacific, outlook to 2020," MPRA Paper 28970, University Library of Munich, Germany.
    5. Bank for International Settlements, 2008. "Financial market developments and their implications for monetary policy," BIS Papers, Bank for International Settlements, number 39, November.
    6. Belke, Ansgar H. & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute for the Study of Labor (IZA).
    7. Kenneth N Kuttner, 2008. "Equity prices as leading indicators: the Asian experience," BIS Papers chapters,in: Bank for International Settlements (ed.), Financial market developments and their implications for monetary policy, volume 39, pages 167-192 Bank for International Settlements.
    8. Michael D. Bordo & David C. Wheelock, 2004. "Monetary policy and asset prices: a look back at past U.S. stock market booms," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 19-44.
    9. Kenneth Kuttner, 2011. "Monetary Policy and Asset Price Volatility: Should We Refill the Bernanke-Gertler Prescription?," Department of Economics Working Papers 2011-04, Department of Economics, Williams College, revised Jun 2011.
    10. Barry Eichengreen, 2008. "Should there be a coordinated response to the problem of global imbalances? Can there be one?," Working Papers 69, United Nations, Department of Economics and Social Affairs.
    11. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 359-413.
    12. Maria Socorro Gochoco-Bautista, 2008. "Asset prices and monetary policy: booms and fat tails in East Asia," BIS Working Papers 243, Bank for International Settlements.
    13. W. R. Garside, 2012. "Japan’s Great Stagnation," Books, Edward Elgar Publishing, number 14624.
    14. Gochoco-Bautista, Maria Socorro, 2008. "Asset booms and fat tails in East Asia: Symmetric or asymmetric risks?," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1617-1640, December.
    15. Daniel Leigh, 2004. "Monetary Policy and the Dangers of Deflation:Lessons from Japan," Economics Working Paper Archive 511, The Johns Hopkins University,Department of Economics.
    16. Adam S. Posen, 2006. "Why Central Banks Should Not Burst Bubbles," International Finance, Wiley Blackwell, vol. 9(1), pages 109-124, May.

    More about this item

    Keywords

    asset price bubble; monetary policy; Japan;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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