Where danger lurks

Olivier Blanchard 03 October 2014

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Until the 2008 global financial crisis, mainstream US macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment.

The benign view reflected both factors internal to economics and an external economic environment that for years seemed indeed increasingly benign.

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Topics:  Macroeconomic policy Monetary policy

Tags:  macroeconomics, global crisis, great moderation, rational expectations, nonlinearities, fluctuations, business cycle, monetary policy, inflation, bank runs, deposit insurance, sudden stops, capital flows, liquidity, maturity mismatch, zero lower bound, liquidity trap, capital requirements, credit constraints, precautionary savings, housing boom, Credit crunch, unconventional monetary policy, fiscal policy, sovereign default, diabolical loop, deflation, debt deflation, financial regulation, regulatory arbitrage, DSGE models

To exit the Great Recession, central banks must adapt their policies and models

Marcus Miller, Lei Zhang 10 September 2014

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“Practical men…are usually the slaves…[of] some academic scribbler of a few years back” – John Maynard Keynes.

For monetary policy to be most effective, Michael Woodford emphasised the crucial importance of managing expectations. For this purpose, he advocated that central banks adopt explicit rules for setting interest rates to check inflation and recession, and went on to note that:

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Topics:  Global crisis Macroeconomic policy Monetary policy

Tags:  Taylor rule, forward guidance, great moderation, global crisis, Great Recession, quantitative easing, DSGE models, expectations, tapering, US, UK, Europe, eurozone, ECB, Bank of England, central banking, IMF, unconventional monetary policy

The myth of financial innovation and the Great Moderation

Wouter den Haan, Vincent Sterk 08 November 2011

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Many changes have taken place in the financial sector over the last couple of decades. Deregulation was followed by a burst of innovation, a step-up in leverage, an increase in cross-border capital flows, and larger financial institutions. The recent financial crisis is believed to have been caused by some of these changes in the financial sector, and lawmakers are under pressure to come up with new legislation that will do a better job in restraining the financial sector and result in a more stable economy.

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Topics:  Financial markets

Tags:  financial institutions, business cycles, great moderation

Does the Great Recession really mean the end of the Great Moderation?

Olivier Coibion, Yuriy Gorodnichenko 16 January 2010

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“No one knows for sure what caused the Great Moderation. Some had credited increased sophistication of financial markets and the wisdom of the Federal Reserve Board... Well, folks, it turns out the great moderation was something of a fluke.” – Robert Reich, 15 July 2008

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Topics:  Macroeconomic policy

Tags:  inflation, monetary policy, great moderation