The Impact of the Great Recession on Monetary and Fiscal Policy in Developed Market Economies

Damir Šehović

doi:10.1515/bsrj-2015-0004

Abstract

Abstract Background: With the occurrence of the crisis in 2007, which caused the largest economic contraction since the Great Depression in the thirties, it has become evident that the previous understanding of strategies, effects and roles of monetary and fiscal policy should be redefined. Objectives: The aim of this paper is to illustrate a possible expected change in monetary and fiscal policy in developed market economies that could occur as a consequence of the Great Recession. Methods/Approach: The paper provides a comparative analysis of various primary economic variables related to the developed OECD countries, as well as the empirical testing of the selected theoretical assumptions. Results: The changes in monetary policy refer to the question of raising target inflation, considering a possible use of aggregate price level targeting and paying attention to the role of central banks in suppressing the formation of an asset bubble. The success of fiscal policy in attaining stabilization depends on the size of possible fiscal measures and creation of automatic stabilizers. Conclusions: For the most part, monetary and fiscal policies will still stay unchanged, although some segments of these policies need to be improved.

Highlights

The seventies and the beginning of the eighties of the 20th century were known for distinct shocks which resulted in double-digit inflation and unemployment
The argument for this claim is found in the fact that financial rescue, fiscal stimulators and lower incomes during the economic crisis resulted in the firmest possible correlation between the public debt and GDP as a deficit in developed economies during the last forty years
Under the influence of contemporary post-crisis theoretical and empirical research, it seems almost certain that there modifications of the strategic framework of monetary policy will be made

Summary

Introduction

The seventies and the beginning of the eighties of the 20th century were known for distinct shocks which resulted in double-digit inflation and unemployment. The period from the early eighties until the beginning of the global economic crisis in mid-2007 was characterised by the emergence of relatively reassuring economic trends including tendencies such as relatively low and stable inflation and the. The impression was that the mentioned consensus resulted in theoretical completion and practical confirmation of previous macroeconomic concepts, which is why many prominent economists, including Lucas and Bernanke, asserted that the cyclical trends of the economic growth are under control, and that the problem of depression prevention is solved. The confidence of macroeconomists was not undermined by occasional crises such as those in Japan in 1990, Mexico, Indonesia, Malaysia, Thailand and Korea in 1997, and Argentina in 2002. Because it became evident that the confidence of the holders of these two policies and their ability to successfully manage them in the direction of achieving the desired goals of economic policy is seriously undermined

Consequences of the Great Recession on the monetary policy strategy

The impact of the Great Recession on fiscal policy

Possible changes in fiscal policy after the Great Recession

Conclusion