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It takes more than a bubble to become Japan

Posen, Adam

Did monetary ease 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 re-examination of what actually occurred in Japan 1985-1990, I conclude the bubble was just as likely to occur whatever monetary policy within reason would have done. Did the bubble's burst 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 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. What central bankers should learn from Japan's bubble is the benefits of a more thoughtful approach to assessing potential growth and of easing rapidly in the face of asset price declines, not any concern for targeting asset prices per se.

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Academic Units
Center on Japanese Economy and Business
Publisher
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Series
Center on Japanese Economy and Business Working Papers, 217
Published Here
February 11, 2011
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