Monetary Policy and Economic Performance: The Recent Experience of the United States and Japan

avoided severe overheating in the late 1980s and the subsequent recession was shallow and followed by a sustained and robust recovery with low inflation. By contrast, monetary policy arguably contributed to the "bubble" economy in Japan in the late 1980s, and since the early 1990s the Japanese economic growth has been very weak. The United States economy is now at or slightly above the previously estimated level of potential output with no signs of rising inflation, while the Japanese economy is performing well below potential. It must be said, of course, that the picture is not all one- sided: since the early 1980s, Japan has enjoyed both higher growth and lower inflation than the United States on average (Figure 1). This paper examines the extent to which the evolution of monetary policy frameworks and actual policy decisions in the United States and Japan have contributed to the differences in macroeconomic performance of the two countries in the 1980s and 1990s. It considers the extent to which monetary policy decision-making was faulty and how it might have done better, given the information available to policy-makers at the time. The discussion also provides some insights into the contributions of academic thinking to monetary policy-making, based in part on my own experience as a central banker and a policy adviser in an international organisation engaged in international economic policy co-operation.