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The role of macroeconomic policies in the global crisis

Pietro Catte (), Pietro Cova (), Patrizio Pagano () and Ignazio Visco ()
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Pietro Catte: Banca d'Italia
Ignazio Visco: Banca d'Italia

No 69, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper argues that the lack of timely and decisive policy action to correct domestic and external imbalances contributed crucially to the build-up of financial excesses that led to the financial crisis and the Great Recession. We focus on 2002-07 and perform a number of counterfactual simulations to investigate two central elements of the story, namely: (a) an over-expansionary US monetary policy and the absence of effective macro-prudential supervision, which permitted a prolonged expansion of debt-financed consumer spending; (b) the decision of China and other emerging countries to pursue an export-led growth strategy supported by pegging their currencies to the US dollar, resulting in a huge build-up of their official reserves, in conjunction with sluggish domestic demand in surplus advanced economies characterized by low potential output growth. The results of the simulations lend support to the view that if substantial, globally coordinated demand rebalancing had been undertaken in a timely manner, the macroeconomic and financial imbalances would not have accumulated to the extent that they did and the financial turmoil might have had less drastic global consequences.

Keywords: global imbalances; financial crisis; monetary policy; macroprudential regulation; structural reforms. (search for similar items in EconPapers)
JEL-codes: E52 F42 F43 F47 G15 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-fdg and nep-mac
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Journal Article: The role of macroeconomic policies in the global crisis (2011) Downloads
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