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

Adam, Christopher; Vines, David

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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...[Show more]

dc.contributor.authorAdam, Christopher
dc.contributor.authorVines, David
dc.date.accessioned2015-12-10T22:27:03Z
dc.identifier.issn0266-903X
dc.identifier.urihttp://hdl.handle.net/1885/54031
dc.description.abstractThis 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.
dc.publisherOxford University Press
dc.sourceOxford Review of Economic Policy
dc.subjectKeywords: economic policy; financial crisis; fiscal policy; global economy; IMF; interest rate; Keynesian theory; macroeconomics; monetary policy Finance; Fiscal policy; Global financial crisis; International policy coordination; Macroeconomic interdependence; Monetary policy
dc.titleRemaking macroeconomic policy after the global financial crisis: a balance-sheet approach
dc.typeJournal article
local.description.notesImported from ARIES
local.identifier.citationvolume25
dc.date.issued2009
local.identifier.absfor160505 - Economic Development Policy
local.identifier.ariespublicationu4326120xPUB289
local.type.statusPublished Version
local.contributor.affiliationAdam, Christopher, University of Oxford
local.contributor.affiliationVines, David, College of Asia and the Pacific, ANU
local.description.embargo2037-12-31
local.bibliographicCitation.issue4
local.bibliographicCitation.startpage507
local.bibliographicCitation.lastpage552
local.identifier.doi10.1093/oxrep/grq014
dc.date.updated2016-02-24T10:55:58Z
local.identifier.scopusID2-s2.0-77953672171
CollectionsANU Research Publications

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