Working Paper: NBER ID: w24179
Authors: Olivier J. Blanchard; Lawrence H. Summers
Abstract: The obvious lesson from the Great Financial Crisis is that the financial system matters and financial crises will probably happen again. The second, more general, lesson is that the economy is often not self-stabilizing. These two lessons, together with an environment where neutral interest rates are likely to remain low, have clear implications for the design of stabilization policies. \nAt a minimum, they suggest that policies may need to become more aggressive, both ex-ante and ex-post, with a rebalancing of the roles of monetary, fiscal and financial policies. In particular, while low neutral rates decrease the scope for using monetary policy, they increase the scope for using fiscal policy. Think of such rebalancing as evolution. If however, neutral rates become even lower, or financial regulation turns out to be insufficient to prevent crises, more dramatic measures, including larger fiscal deficits, revised monetary policy targets, or sharper restrictions on the financial system, may be needed. Think of this as revolution. Time will tell.
Keywords: No keywords provided
JEL Codes: E02; E20; E31; E32; E42; E5; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial instability (F65) | economic downturns (F44) |
| low neutral interest rates (E43) | shift in policy focus (O24) |
| temporary shocks (E32) | permanent changes in output levels (E23) |
| regulatory measures (G18) | financial stability (G28) |