Central Banking: Before, During, and After the Crisis

The global financial crisis and the bubbles preceding it pose mounting issues for a central bank. The Bank of Japan was the first central bank among advanced countries to confront those issues in the postwar period. Japan’s experience intellectually stimulated academics and policymakers overseas, which led to the Bank being flooded with policy proposals, including highly experimental ones. With the exception of just a few cases, however, the low growth in Japan following the bursting of a bubble was often simply interpreted as a unique episode caused by a failure to implement bold policy measures in a prompt manner. As many of you may recall, there was an oft-quoted paper coauthored by a number of Federal Reserve economists entitled "Preventing Deflation: Lessons from Japan’s Experience in the 1990s" that was released in 2002. This paper argued as follows: [O]ur sense is that much of the failure of monetary loosening to support asset prices and to boost the economy owed to offsetting shocks rather than to a genuine breakdown of the monetary transmission mechanism. ... There is little evidence that the transmission channels of monetary policy were so diminished as to have obviated the benefits of faster and sharper monetary easing in the 1991-95 period. At that time, I found that such a view on the effectiveness of monetary policy was too sanguine [...]