It Is Private, Not Public Finances that Are Out of Whack

When the private sector as a whole is forced into debt minimization following the bursting of a debt-financed bubble, the money multiplier turns negative at the margin and government borrowing and spending become essential in maintaining both the GDP and money supply. With unborrowed private savings...

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Bibliographic Details
Published inGerman economic review (Oxford) Vol. 15; no. 1; pp. 166 - 190
Main Author Koo, Richard C.
Format Journal Article
LanguageEnglish
Published Berlin Blackwell Publishing Ltd 01.02.2014
De Gruyter
Walter de Gruyter GmbH
Subjects
Balance sheet recession
Bond market
Capital market policy
Currencies
debt Minimization
deleveraging
Economic theory
eurozone crisis
Finance
forward guidance on fiscal policy
Global economy
Gross domestic product
International
macroeconomic policy
negative money multiplier
Per capita income
Private sector
Public borrowing
Public finance
Studies
unborrowed savings
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Summary:When the private sector as a whole is forced into debt minimization following the bursting of a debt-financed bubble, the money multiplier turns negative at the margin and government borrowing and spending become essential in maintaining both the GDP and money supply. With unborrowed private savings languishing in the financial system, the market also encourages government borrowing in the form of low bond yields which is a natural corrective mechanism of an economy suffering from balance sheet recession. In the eurozone, this corrective mechanism fails because of the ease of capital flight between government bond markets within the currency zone.
Bibliography:ark:/67375/WNG-BNV6PLMG-L
ArticleID:GEER12028
istex:08DA400829B2D9A4667C108E2C039B4445E0ADE0
ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:1465-6485
1468-0475
DOI:10.1111/geer.12028