Monetary Policy in a Changing Environment

Abstract

In percentages Graph I.1Core inflation Short-term interest rate Note: The average duration of each country's growth rate cycle is indicated. An alternative definition of the cycle is based on expansions and contractions. Because of the strong growth in nearly all these countries in the pre-1980 period, such cross-country comparisons are not meaningful. However, using the NBER business cycle dates for the United States, the average duration of business cycle expansions has more than doubled from 47 months in the pre-1983 period to 107 months afterwards.This moderation has been particularly apparent in the United States, which experienced the longest expansion on record in the 1990s, following another comparatively long upswing in the 1980s and a comparatively mild recession in 1990-91. So far, the most recent recession has also been rather shallow by historical standards. Not all countries, however, have shared this positive experience. In particular, output volatility appears to have been greater in several economies that have gone through serious episodes of widespread financial distress. In the industrial world, the most notable example has been Japan. 5 And the same has been true for several countries in East Asia. In all of these cases, the crises had been preceded by a long period of rapid and rather steady growth (Graph I.4), and hence comparatively low volatility. Greater prominence of financial booms and bustsThe negative experiences in these countries point to a more generalised feature of the economic environment since the mid-1980s: the greater size and amplitude of medium-term fluctuations in asset prices, often accompanied by rapid credit expansion. 6 Given data availability, this phenomenon is best illustrated for industrial countries. Graph I.5 summarises the evidence for a sample of countries for which data on commercial and residential property prices were available. The behaviour of asset prices is captured by an aggregate asset price index, which weighs property and equity prices by rough estimates of their shares in private sector 5 This is missed in Table I.4 because of the common date chosen for the break. See Dalsgaard et al (2002) and Blanchard and Simon (2001). 6These are amply documented in Borio et al (1994, 2001) as well as in Borio and Lowe (2002a).