Asset deflation and extended recessions : economic policies and evidence from the United States and Japan

This thesis examines comparative theoretical frameworks and empirical evidence in evaluating the effect of asset deflation on economic conditions. Specifically, the focus is on the early 1990's economies of the United States and Japan. Two macroeconomic theories of asset deflation and financial crisis are presented. An exposition of data series from both countries is assessed on the basis of the relationship between asset deflation and the severity and length of recessionary economic periods. The empirical results are compared to the implications of each macroeconomic model of asset deflation.

It was concluded that the United States economy did not exhibit Fisherian debt deflation in the early 1990's. The Japanese economy did exhibit mild debt deflation conditions. Both Japan and the United States economies exhibited behavior consistent with Post Keynesian asset deflation theory.

Government intervention in asset markets and general stimulative actions appear to have prevented a great depression from occurring in Japan. Federal reserve actions in the United States were not immediately effective in stimulating the economy. After a lengthy period, however, lower interest rates positively affected interest sensitive segments of the economy.