INFLATION, ASSET MARKETS, AND ECONOMIC-STABILIZATION - LESSONS FROM ASIA

In the 1980s, a new convention emerged in the economics profession-tha t central banks' primary, even sole, responsibility should be con trol ling consumer price inflation. By the 1990s, this view was gaining cre dibility in policy circles, and various countries mandated that their central banks make inflation their primary focus (generally with an es cape clause in the event of a severe economic shock). Here in the Unit ed States, this orthodoxy never gained official status; rather, the U. S. policy goal remains promoting stable long-term growth using a varie ty of theoretical approaches. The recent problems in East Asia, as wel l 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 comparab le episodes in the United States, this article suggests that a preoccu pation 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 imbalan ces would have been better addressed by monetary policy, or by improve d disclosure, supervisory intervention, or tax policy, a broader persp ective might have identified problems in Asia before they assumed such crippling proportions. The article concludes by suggesting that polic ymakers may want to look for signs of overheating emanating from asset markets and from emerging imbalances in the real economy, even when c onsumer prices are well behaved. Signs that high levels of debt may be financing increasingly optimistic investments warrant particular conc ern. The article also stresses the vulnerabilities that newly liberali zed financial markets may introduce and the importance of measures tha t encourage the private sector to price risk more accurately and force it to bear the costs of international financial crises more fully. Ov erall, it advocates an eclectic approach to assessing economic perform ance.