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Remaking macroeconomic policy after the global financial crisis: a balance-sheet approach

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  • Christopher Adam
  • David Vines

Abstract

This paper describes the origins of the global financial crisis and how the prevailing New Keynesian macroeconomic orthodoxy failed to anticipate its severity. This failure, we argue, stemmed from an incomplete understanding of the pivotal role of financial institutions in the amplification of the crisis and its transmission to the wider economy. Low global interest rates and a consequent 'search for yield' in the pre-crisis period encouraged financial institutions to build highly leveraged balance sheets which, in turn, generated extremely large asset-price movements when a 'small event'--the downturn in the US sub-prime mortgage market--triggered the worldwide crisis. The paper then briefly describes the element of the broadly successful and coordinated macroeconomic policy response to the crisis before turning to the medium-term challenges facing policy-makers in sustaining global recovery. At the national level, we focus on the resolution of fiscal imbalances which contributed, in part, to the crisis, and which then worsened because of the policy actions which have been taken to deal with it. At the international level, we emphasize the need to rectify the imbalances between savings and investment in many significant countries. This will require greater coordination of macroeconomic policy across the world's major economies. It will also involve strengthening the role, and the governance, of the International Monetary Fund. Copyright 2009, Oxford University Press.

Suggested Citation

  • Christopher Adam & David Vines, 2009. "Remaking macroeconomic policy after the global financial crisis: a balance-sheet approach," Oxford Review of Economic Policy, Oxford University Press, vol. 25(4), pages 507-552, Winter.
  • Handle: RePEc:oup:oxford:v:25:y:2009:i:4:p:507-552
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    File URL: http://hdl.handle.net/10.1093/oxrep/grq014
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    Cited by:

    1. David Vines, 2010. "What Keynes Missed and Krugman is Missing: The Short/Long Choice," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 17(1), pages 101-112.
    2. ORASTEAN Ramona, 2013. "The Us Dollar, The Euro, The Japanese Yen And The Chinese Yuan In The Foreign Exchange Market – A Comparative Analysis," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 8(2), pages 102-107, August.
    3. Sherstnev, Mikhail, 2011. "Экономический Кризис, Мировая Экономика, Экономическая Наука И Экономическая Политика
      [Economic crisis, world economy, economics and economic policy]
      ," MPRA Paper 31912, University Library of Munich, Germany.
    4. Robert Boyer, 2012. "The four fallacies of contemporary austerity policies: the lost Keynesian legacy," Cambridge Journal of Economics, Oxford University Press, vol. 36(1), pages 283-312.
    5. Sherstnev, Mikhail, 2013. "World economy, economics and economic policy: what emerges after the crisis?," MPRA Paper 49019, University Library of Munich, Germany.
    6. Allsopp, Christopher & Vines, David, 2015. "Monetary and fiscal policy in the Great Moderation and the Great Recession," CEPR Discussion Papers 10894, C.E.P.R. Discussion Papers.

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