The new deflation and housing market bubbles in the USA and UK: a monetary policy dilemma

Purpose The purpose of this paper is to develop an analysis of the improbable events of housing market bubbles occurring in a period when US and UK central bankers were responding to perceived risks of a new deflation. Design/methodology/approach The methodology focuses on how the anti-deflation pol...

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Bibliographic Details
Published in:International journal of social economics 2017-01, Vol.44 (6), p.760-773
Main Authors: Bono, Heather Richardson, Leathers, Charles G, Raines, J. Patrick
Format: Article
Language:English
Subjects:
Aggregate demand
Aggregate supply
Banking
Central banks
Deflation
Economic crisis
Economics
Employment
Federal Reserve monetary policy
Globalization
Homeowners
Housing
Housing market
Housing prices
Income inequality
Inflation
Interest rates
Keynesian theory
Monetary policy
Prices
Rents
Technology
Trends
Unemployment
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Summary:Purpose The purpose of this paper is to develop an analysis of the improbable events of housing market bubbles occurring in a period when US and UK central bankers were responding to perceived risks of a new deflation. Design/methodology/approach The methodology focuses on how the anti-deflation policies implemented by the Federal Reserve and the Bank of England contributed to the housing market bubbles. The central bankers perceived the deflation as a Keynesian short-run deficiency in aggregate demand, triggered by a financial crisis. Indications are that the deflation is in the nature of long-run aggregate-supply-driven trend as explained in Veblen’s theory of “chronic” deflation driven by cost-reducing advances in technology and globalization. Findings The Keynesian anti-deflation policies of the Federal Reserve and Bank of England failed to counter the deflation risks while contributing to housing market bubbles. Moreover, the policies failed to address the structural problems of unemployment and income inequality associated with long-run aggregate supply deflation. Originality/value Effective policies must be based on a correct theoretical understanding of the problems. The chronic nature of the new deflation points to the need for new approaches to deal with the negative income and employment effects that exclude an increasing number from the housing markets.
ISSN:0306-8293
1758-6712
DOI:10.1108/IJSE-10-2015-0260