WORLD RECESSION: WHAT WENT WRONG?

Robert L. Hetzel

Economic Affairs, 2009, vol. 29, issue 3, 17-21

Abstract: This paper starts by framing the issue of how seemingly intuitive responses to the distress suffered during recession can not only be ineffective but also can harm long‐term growth. It then goes on to discuss the most long‐lived of explanations of cyclical instability, the explanation based on swings in the psychology of financial markets. Such explanations offer no framework for thinking about the price system and the role of the interest rate. Based on a discussion of the role of the interest rate in smoothing cyclical fluctuations, the paper offers a critique of current policy.

Date: 2009
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