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The role of macroeconomic policies in the global crisis

  • Catte, Pietro
  • Cova, Pietro
  • Pagano, Patrizio
  • Visco, Ignazio

This paper argues that the lack of timely and decisive policy action to correct domestic and external imbalances contributed crucially to the build-up of financial excesses that led to the financial crisis and the Great Recession. We focus on 2002–2007 and perform a number of counterfactual simulations to investigate two central elements of the story, namely: (a) an over-expansionary US monetary policy and the absence of effective macro-prudential supervision, which permitted a prolonged expansion of debt-financed consumer spending and (b) the choice by China and other emerging countries to pursue an export-led growth strategy supported by pegging their currencies to the US dollar, in conjunction with sluggish domestic demand in major advanced economies characterized by low potential output growth. The results of the simulations lend support to the view that if substantial, globally coordinated demand rebalancing had been undertaken early on, the macroeconomic and financial imbalances would not have accumulated to the extent that they did and the financial turmoil might have had less drastic global consequences.

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File URL: http://www.sciencedirect.com/science/article/pii/S0161893811000536
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Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 33 (2011)
Issue (Month): 6 ()
Pages: 787-803

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Handle: RePEc:eee:jpolmo:v:33:y:2011:i:6:p:787-803
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505735

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