Lax money supply under globalization and detecting an early sign to anticipate deep recession

Yong-Yil Choi

Applied Economics, 2014, vol. 46, issue 26, 3193-3201

Abstract: This article uncovers a macroeconomic threshold for avoiding deep recession under globalization. The analysis shows that there is a long-run natural rate of substitution between the broadest measure of money balances and nominal government spending, namely the natural fiscal velocity. Applying this threshold to the actual economy can give us two benefits: first, comparing the actual rate of substitution between the broadest measure of money balances and nominal government spending with the natural fiscal velocity can provide an early sign to anticipate deep recession under globalization. Second, controlling the actual fiscal velocity so as not to exceed the natural one is such a macro calibration that the authorities can easily justify their pre-emptive actions as a means of avoiding a deep recession trap under globalization.

Date: 2014
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DOI: 10.1080/00036846.2014.925078

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