David R. Henderson  

Bernanke: Turning Japanese

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So Bernanke responds that he is being consistent because in Japan there was deflation whereas currently there is none. But as Ryan Avent notes, his research on Japan was about more than deflation--it was about a shortage of aggregate demand. This point can be easily seen by looking at his 1999 paper where he discusses Japan's economic problems. The first section after the introduction reads as follows:

Diagnosis: An Aggregate Demand Deficiency

Before discussing ways in which Japanese monetary policy could become more expansionary, I will briefly discuss the evidence for the view that a more expansionary monetary policy is needed. As already suggested, I do not deny that important structural problems, in the financial system and elsewhere, are helping to constrain Japanese growth. But I also believe that there is compelling evidence that the Japanese economy is also suffering today from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult.

If the section header is not obvious enough, the first paragraph makes clear that Bernanke believed there was a serious "aggregate demand deficiency" problem in Japan. Deflation is nowhere in that lead paragraph. It only appears later as one of several indicators of the AD deficiency.


This is from an excellent post about Bernanke's monetary policy by David Beckworth of Texas State University in San Marcos. The whole thing is worth reading.

As Beckworth notes, the person who asked the excellent question that led to Bernanke's answer was NY Times reporter Binyamin Applebaum.

HT to David Levey.


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CATEGORIES: Monetary Policy



COMMENTS (1 to date)
Olivier Braun writes:

That quote "the Japanese economy is also suffering today from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult" reminds me of William Hutt’s teaching, in his The Keynesian Episode.
He criticized the Keynesian concept of “effective demand” because it hides the real problem of an economy in recession : the dis-coordination of the economy, that is the prices of the factors to high relative to the prices of finished goods. Because of institutional rigidities (regulations or failure of government to oppose private use of force), factors of production being priced too high to clear the market are withheld, and thus a source of demand for non-competing products is missing.
The Keynesian remedy is just that : via inflation (via pubic spending and deficits) to re-coordinate “crudely” the economy, thanks to the lag between inflation of consumer prices and factor prices. Hutt explains that what Keynes really wanted was to maintain effective “money” demand. Of course, that works only, as Hutt pointed out repeatedly, with unexpected inflation. But the “structural problems” are unaffected, the politicians seeing no need to address them if they can inflate troubles away.

[specialty characters changed to quotation marks--Econlib Ed.]

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