Macroeconomic trouble and policy challenges in the wake of the financial bust

• Main Author: Angel Asensio
• Format: Article
• Language: English
• Published: Editora 34 2011-06-01
• Series: Brazilian Journal of Political Economy
• Subjects: depression; financial crisis; inflation; macroeconomic policy
• Online Access: http://www.scielo.br/scielo.php?script=sci_arttext&pid=S0101-31572011000200002&lng=en&tlng=en

Contrasting with the 1929 great crisis, authorities intervened forcefully in 2008 to stop the disintegration of the financial system. Governments and central banks then sought to revise the prudential regulation in depth. It would be optimistic, however, to believe that prudential measures, alone, could deliver full economic recovery, at least in the countries that had been involved in the financial turmoil. Indeed, the collapse of the "state of confidence" and the negative effects of private debts on consumption and investment decisions have fed depressive forces and policy challenges which could hold for a while, even once the financial sector is made safe. On the one hand, the economic slowdown and the direct and indirect assistance provided by the governments to the private sectors are having a heavy impact on public finances, meanwhile, on the other hand, the massive amounts of money which artificially inflated the prices of housing and financial products could produce inflationary pressures in the post-crisis period, unless a new assets bubble is allowed for. Authorities could therefore be facing high unemployment in a damaged context of public deficits and inflationary pressures. The paper aims at discussing these new challenges. The inadequacy of inflation targets and fiscal orthodoxy in a depressed economy is emphasized, and the outlines of a Post Keynesian alternative policy are examined.