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

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  • Šehović Damir

    () (University of Montenegro, Faculty of Economics, Podgorica, Montenegro)

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.

Suggested Citation

  • Šehović Damir, 2015. "The Impact of the Great Recession on Monetary and Fiscal Policy in Developed Market Economies," Business Systems Research, Sciendo, vol. 6(1), pages 56-71, March.
  • Handle: RePEc:bit:bsrysr:v:6:y:2015:i:1:p:56-71
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    References listed on IDEAS

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    1. Otmar Issing, 2009. "Asset Prices and Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 45-51, Winter.
    2. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, vol. 96(3), pages 279-294.
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    4. Martin Feldstein, 2009. "Rethinking the Role of Fiscal Policy," American Economic Review, American Economic Association, vol. 99(2), pages 556-559, May.
    5. Stephan Fahr & Roberto Motto & Massimo Rostagno & Frank Smets & Oreste Tristani, 2013. "A monetary policy strategy in good and bad times: lessons from the recent past," Economic Policy, CEPR;CES;MSH, vol. 28(74), pages 243-288, April.
    6. Woodford Michael, 2002. "Inflation Stabilization and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-53, February.
    7. Pavlina R. Tcherneva, 2011. "Fiscal Policy Effectiveness: Lessons from the Great Recession," Economics Working Paper Archive wp_649, Levy Economics Institute.
    8. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
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