Still fresh after his performance as the lone dissenting dove on the UK’s Monetary Policy Committee, Adam Posen has now used the expertise for which he is perhaps best known — Japan’s lost decade(s) — to argue in a speech that easy monetary policy doesn’t lead to asset bubbles. Not inevitably, anyway.

Posen’s targets in the speech are the world’s surplus countries, which he believes should embrace more accomodative monetary policy to stimulate domestic demand.

We’ll give you his conclusion first, and then work back through some the argument:

In particular, I want to argue that accommodative monetary policy does not cause asset price bubbles. This argument is based on the empirically supported premise that it is private capital flows and differences in productivity that determine current accounts (and asset prices) for the most part. Barring the self-destructive subjugation of all macroeconomic goals to a fixed exchange rate, the instruments available to central banks of short-term interest rates and bank reserves are of little lasting impact on current accounts …

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Robin Harding

A Japanese contact, who shall remain nameless, recently urged me to read the questionnaire that US academic Adam Posen submitted to the UK’s Treasury Select Committee last July before he became a member of the Bank of England’s Monetary Policy Committee.

Mr Posen is an expert on Japan’s lost decade who wrote two books on it in 1998 and 2000. His answer on Japan is both an excellent summary of the lessons – such as the limitations of quantitative easing – and revealing on how Japan’s economic situation hasn’t developed quite the way that anybody expected.

It is worth reading in full – question 10 on page 8 – but I’ve posted a few of the most interesting paragraphs below. Read more