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The World in Balance Sheet Recession


  • Richard Koo

    (Nomura Research Institute)


There is quite a bit of confusion in the policy circles, in the academic circles and also in the markets regarding the international economic situation unleashed by the 2007-2008 crisis. And, as there is so much confusion, the economic policy responses have been largely inconsistent, not only in the United States but also all around the world, and this might be prolonging the recession unnecessarily. However, what we are currently going through happened in Japan exactly 15 years ago. What is happening now is that, after the bursting of the bubble, the private sector is deleveraging or reducing its debt to a minimum. This is called a balance sheet recession. And, in this type of recession, cutting the interest rate to zero and increasing the monetary base do not translate into an improvement of credit to the private sector and into a recovery of economic activity. The monetary policy becomes ineffective. As shown by the Japanese experience, the response to prevent the collapse of economic activity lies in the fiscal policy, i.e. the government should increase spending by financing itself with the savings the private sector generates in order to deleverage. Only after the balance sheets have been repaired and the private sector is willing to, and may, get into debt, should the government start to cut its budget deficit.

Suggested Citation

  • Richard Koo, 2011. "The World in Balance Sheet Recession," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(63), pages 7-39, July - Se.
  • Handle: RePEc:bcr:ensayo:v:1:y:2011:i:63:p:7-39

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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. ¿Está el mundo en una recesión de balances?
      by Adrián Ravier in Punto de Vista Economico on 2012-05-16 23:46:22

    More about this item


    balance sheet recession; deleveraging; fiscal policy; international financial crisis; monetary policy;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G01 - Financial Economics - - General - - - Financial Crises


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