Bernanke: Turning Japanese
By David Henderson
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.