On Monetary and Fiscal Policies FOR the Great Recession

The current crisis was revealed to the European public on August 7, 2007. 2009 is the worst year on record. The worst so far, that is, since we know 2012 will be bad but cannot tell just how bad.
Since we are among those who believe that economic policies are there to counteract crises and jump-starting the economy (any economy) is possible, in this paper we ask whether policy mixes adopted over the last four years have been effective and, if not, why that was the case.

We find that, generally speaking, only in the second half of 2008 and early 2009 appropriate policy mixes were adopted by most countries, and that ever since the European policy mix has not been directed at reviving aggregate demand.

To put it differently:

  1. Why is such a brutal recession being forced on the European people? The evolution of the monetary-fiscal policy mix over the last four-and-one half years shows that a re-starting of the real economy was an issue in 2008, but it has never been one since. On average, European governments have been running, and pledge to run in the foreseeable future, very aggressive recessionary fiscal policies; the ECB has adopted an inadequate (from the real side of the economy point of view) monetary policy easy to a degree never seen before, despite there is abundant evidence that monetary policy is not working.
  2. How will the liquidity held by financial and non-financial firms alike find its way back into the economy? I submit that the combination of immense amounts of liquidity held by banks and contractionary, debt-reducing policies are the proper policy combination to ensure that sufficient liquidity will be available to finance the coming wave of privatizations and state-owned property sales –apparently, the only way European policy makers can think their way out of the recession.

On Monetary and Fiscal Policies For The Great Recession

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