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Balance sheet recession as the ‘other half’ of macroeconomics

  • Richard C. Koo

    (Nomura Researcj Institute)

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    Once every several decades, the private sector loses its mind in a bubble, leverages itself up to the hilt, and is forced into debt minimization in order to remove its debt overhang following the crash. When the private sector as a whole is deleveraging, even at record low interest rates, monetary policy is largely ineffective while fiscal policy becomes absolutely essential in keeping both the economy and money supply from shrinking. The superior effectiveness of monetary policy during private sector profit maximization and of fiscal policy during private sector debt minimization indicates that the latter was the long-overlooked ‘other half’ of macroeconomics.

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    File URL: http://www.elgaronline.com/view/journals/ejeep/10-2/ejeep.2013.02.01.xml
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    Article provided by Edward Elgar in its journal European Journal of Economics and Economic Policies: Intervention.

    Volume (Year): 10 (2013)
    Issue (Month): 2 ()
    Pages: 136-157

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    Handle: RePEc:elg:ejeepi:v:10:y:2013:i:2:p136-157
    Contact details of provider: Web page: http://www.elgaronline.com/ejeep

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