It Is Private, Not Public Finances that Are Out of Whack

Richard C. Koo

German Economic Review, 2014, vol. 15, issue 1, 166-190

Abstract: type="main" xml:id="geer12028-abs-0001">

When the private sector as a whole is forced into debt minimization following the bursting of a debt-financed bubble, the money multiplier turns negative at the margin and government borrowing and spending become essential in maintaining both the GDP and money supply. With unborrowed private savings languishing in the financial system, the market also encourages government borrowing in the form of low bond yields which is a natural corrective mechanism of an economy suffering from balance sheet recession. In the eurozone, this corrective mechanism fails because of the ease of capital flight between government bond markets within the currency zone.

Date: 2014
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