The Bursting of the Technology Bubble:
      International Implications

Presentation at the Central Bank of China, Taipei...
Overview

•   Recent developments.
•   Some historical context.
•   Where to from here?
•   Possible policy responses?



...
Recent developments: real (1)

•   A sharp slowdown in the US.
•   Possible recession in Japan.
•   Some deceleration in t...
4
Recent developments: real (2)

• Slowing down in many sectors.
• Including investment.
• With international effects.




 ...
6
7
Recent developments: nominal

• Inflation generally well behaved.
• But recent uptick in US and euro area.
• Although not ...
9
Recent developments: financial

•   Higher then lower policy rates.
•   Lower then higher long rates.
•   Falling equity p...
11
12
13
14
15
Some historical context: theories
• Hayek, Haberler and the Austrian
  School.
• Credit expansion and New Era
  optimism.....
Some historical context: facts (1)

• Precedents pre-World War I.
• Each associated with a New Era.
• Back-to-the-future t...
18
19
Some historical context: facts (2)

• The equity boom preceding the bust?
• Due to easy policy?
• And credit excesses?



...
21
22
23
Where to from here?

• The New Era paradigm.
• The Keynesian paradigm.
• The Austrian paradigm.




                      ...
The New Era paradigm

• New technology has pushed up
  potential output and profits.
• Buoying share prices, consumption a...
The Keynesian paradigm

• Aggregate demand has outstripped
  supply.
• Postwar slowdowns have all been
  “hard”.
• Possibl...
The Austrian paradigm

•   Many financial imbalances remain.
•   Many macro imbalances remain.
•   Possible financial vuln...
28
29
Possible policy responses

• Given a sharp rebound?
• Given a shallow recession?
• Given a deep recession?




           ...
Given a sharp rebound

• Inflation in the US could rise: energy,
  ULC and the dollar.
• Underlying imbalances could worse...
Given a shallow recession

• Inflation less of a problem.
• Imbalances are resolved over time.
• Unpleasant, but the best ...
Given a deep recession

• Restructure the supply side and
  recapitalise banks as quickly as
  possible.
• Use monetary an...
But cheer up,
it may never happen!



                       34
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2001 05 asia central bank o f_china_presentation_30may2001 [mode de compatibilité]

  1. 1. The Bursting of the Technology Bubble: International Implications Presentation at the Central Bank of China, Taipei, 30 May 2001 William R White Economic Adviser and Head of the Monetary and Economic Department Bank for International Settlements
  2. 2. Overview • Recent developments. • Some historical context. • Where to from here? • Possible policy responses? 2
  3. 3. Recent developments: real (1) • A sharp slowdown in the US. • Possible recession in Japan. • Some deceleration in the euro area. • Knock-on effects elsewhere. 3
  4. 4. 4
  5. 5. Recent developments: real (2) • Slowing down in many sectors. • Including investment. • With international effects. 5
  6. 6. 6
  7. 7. 7
  8. 8. Recent developments: nominal • Inflation generally well behaved. • But recent uptick in US and euro area. • Although not elsewhere. 8
  9. 9. 9
  10. 10. Recent developments: financial • Higher then lower policy rates. • Lower then higher long rates. • Falling equity prices. • Widening credit spreads. • Pushing on a string? 10
  11. 11. 11
  12. 12. 12
  13. 13. 13
  14. 14. 14
  15. 15. 15
  16. 16. Some historical context: theories • Hayek, Haberler and the Austrian School. • Credit expansion and New Era optimism... turns to “excessive optimism”... profits and shares collapse... leading to distress in the financial system. • And all without inflation. 16
  17. 17. Some historical context: facts (1) • Precedents pre-World War I. • Each associated with a New Era. • Back-to-the-future through deregulation and globalisation. • Similarities and differences between Japan (1985-90) and the US (1995- 2000). 17
  18. 18. 18
  19. 19. 19
  20. 20. Some historical context: facts (2) • The equity boom preceding the bust? • Due to easy policy? • And credit excesses? 20
  21. 21. 21
  22. 22. 22
  23. 23. 23
  24. 24. Where to from here? • The New Era paradigm. • The Keynesian paradigm. • The Austrian paradigm. 24
  25. 25. The New Era paradigm • New technology has pushed up potential output and profits. • Buoying share prices, consumption and investment. • And giving better control over inventories. 25
  26. 26. The Keynesian paradigm • Aggregate demand has outstripped supply. • Postwar slowdowns have all been “hard”. • Possible stagflation could make it worse. 26
  27. 27. The Austrian paradigm • Many financial imbalances remain. • Many macro imbalances remain. • Possible financial vulnerabilities. • And the need for rebalancing. 27
  28. 28. 28
  29. 29. 29
  30. 30. Possible policy responses • Given a sharp rebound? • Given a shallow recession? • Given a deep recession? 30
  31. 31. Given a sharp rebound • Inflation in the US could rise: energy, ULC and the dollar. • Underlying imbalances could worsen. • Could imply the need for tightening. 31
  32. 32. Given a shallow recession • Inflation less of a problem. • Imbalances are resolved over time. • Unpleasant, but the best of the possible alternatives. • Policy could stay easy for an extended period. 32
  33. 33. Given a deep recession • Restructure the supply side and recapitalise banks as quickly as possible. • Use monetary and fiscal policies to back in aggregate demand. • Both required because Hayek and Keynes both had a point. 33
  34. 34. But cheer up, it may never happen! 34

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