EconPapers    
Economics at your fingertips  
 

The World in Balance Sheet Recession

Richard Koo
Additional contact information
Richard Koo: Nomura Research Institute

Ensayos Económicos, 2011, vol. 1, issue 63, 7-39

Abstract: There is quite a bit of confusion in the policy circles, in the academic circles and also in the markets regarding the international economic situation unleashed by the 2007-2008 crisis. And, as there is so much confusion, the economic policy responses have been largely inconsistent, not only in the United States but also all around the world, and this might be prolonging the recession unnecessarily. However, what we are currently going through happened in Japan exactly 15 years ago. What is happening now is that, after the bursting of the bubble, the private sector is deleveraging or reducing its debt to a minimum. This is called a balance sheet recession. And, in this type of recession, cutting the interest rate to zero and increasing the monetary base do not translate into an improvement of credit to the private sector and into a recovery of economic activity. The monetary policy becomes ineffective. As shown by the Japanese experience, the response to prevent the collapse of economic activity lies in the fiscal policy, i.e. the government should increase spending by financing itself with the savings the private sector generates in order to deleverage. Only after the balance sheets have been repaired and the private sector is willing to, and may, get into debt, should the government start to cut its budget deficit.

Keywords: balance sheet recession; deleveraging; fiscal policy; international financial crisis; monetary policy (search for similar items in EconPapers)
JEL-codes: E30 E44 E52 E62 G01 (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (29) Track citations by RSS feed

Downloads: (external link)
http://www.bcra.gov.ar/pdfs/investigaciones/63_Koo.pdf Spanish version (versión en Español) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bcr:ensayo:v:1:y:2011:i:63:p:7-39

Access Statistics for this article

Ensayos Económicos is currently edited by Andrés Neumeyer

More articles in Ensayos Económicos from Central Bank of Argentina, Economic Research Department Contact information at EDIRC.
Bibliographic data for series maintained by Federico Grillo ().

 
Page updated 2019-09-18
Handle: RePEc:bcr:ensayo:v:1:y:2011:i:63:p:7-39