OECD Economics Department Working Papers
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
- ISSN: 18151973 (online)
- https://doi.org/10.1787/18151973
Credit Crises and the Shortcomings of Traditional Policy Responses
Economic downturns which have their roots in preceding credit excesses and debt overhang have tended
historically to be long lasting, whether the financial sector remained healthy or not. There are no good reasons
to believe the current global crisis will be any different. Moreover, it is argued in this paper that the policy
responses to the crisis to date, both macroeconomic and structural, will not succeed in restoring sustainable
growth. Monetary and fiscal stimulus might raise aggregate demand in the short run, but they contribute to
higher debt levels which are already working increasingly in the opposite direction. Structural policies intended
to maintain pre crisis production patterns, both in the financial and industrial sectors, ignore the unsustainability
of those structures in the first place.
Alternative policies are needed to meet the G 20’s goal of “strong, sustainable and balanced growth”. They
include more international cooperation between creditor and debtor countries (on both exchange rates and
production structures), more recourse to explicit debt restructuring (for both households and sovereigns), and
structural polices to raise potential growth and make debts more sustainable. Unfortunately, there remain
formidable practical and political obstacles to pursuing such policies.
Future debt crises of the current magnitude could be avoided by using monetary, macro prudential and fiscal
policies more symmetrically over the business cycle. Relative to past behaviour, this would imply more
vigorous resistance to credit financed upswings, and a greater willingness to accept the cleansing effect of minor
downswings. Policies to ensure financial stability are important but secondary.
Keywords: fiscal policy, financial crises, international policy coordination, structural reforms, credit, debt forgiveness, monetary policy
JEL:
E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy;
H12: Public Economics / Structure and Scope of Government / Crisis Management;
G01: Financial Economics / General / Financial Crises;
E58: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Central Banks and Their Policies;
B50: History of Economic Thought, Methodology, and Heterodox Approaches / Current Heterodox Approaches / Current Heterodox Approaches: General
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