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Working Paper No. 4: The impact of the crisis on the conduct of monetary and fiscal policies

Working Paper No. 4: The impact of the crisis on the conduct of monetary and fiscal policies

20/09/11
The financial crisis triggered in 2007 fundamentally changed the economic policy instruments and how economists have traditionally analyzed, although it is still early to measure the full extent.

The first certainty that he had to question is the idea that macroeconomic fluctuations under control. The era of the Great Moderation, that developed countries have been known since the mid-1980s, does not seem so out of date.

This economic context has led to a new synthesis in economic thought, where economies are moving away from the balance as a result of exogenous shocks and not sources of internal processes of cumulative imbalances. The consequences of the 1987 stock market crash or the bursting of the dotcom bubble in 2000 were indeed well controlled. Little attention was also paid to the financial regulation and the impact of financial crisis on the real. Moreover, monetary policy was the main instrument for countercyclical policy, conduct as independently as possible, allowing a faster implementation of fiscal policy subject to political constraints.

But in 2007, the bursting of the housing bubble in the U.S. in particular, and the subprime crisis in a deregulated financial sector, not only have forced central banks to lower interest rates almost to zero and pursue unconventional policies, but also obliges States to increase significantly their deficits to avoid ultimately suffer another Great Depression. The financial crisis has transformed the world economy: it is now to interpret.

  • Author: Thomas Brandt
  • Keywords: Financial Crisis, Fiscal Policy, Monetary Policy.

 

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