In 1980's, a new convention emerged in the economics profession - that central banks'
primary, even sole, responsibility should be controlling consumer price inflation.
By the 1990's, this view was gaining credibility in policy circles, and various countries
mandated that their central banks make inflation their primary focus (generally with
and escape clause in the event of a severe economic shock). Here in the United States,
this orthodoxy never gained official status; rather, the U.S. policy goal remains
promoting stable long-term growth using a variety of theoretical approaches. ; The
recent problems in East Asia, as well 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 comparable
episodes in the United States, this article suggests that a preoccupation 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 imbalances would have been better addressed by monetary policy, or by
improved disclosure, supervisory intervention, or tax policy, a broader perspective
might have identified problems in Asia before they assumed such crippling proportions.
; This article concludes by suggesting that policymakers may want to look for signs
of overheating emanating from asset markets and from emerging imbalances in the real
economy, even when consumer prices are well behaved. Signs that high levels of debt
may be financing increasingly optimistic investments warrant particular concern.
The article also stresses the vulnerabilities that newly liberalized financial markets
may introduce and the importance of measures that encourage the private sector to
price risk more accurately and force it to bear the costs of international financial
crises more fully. Overall, it advocates an eclectic approach to assessing economic