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The Great Recession

The Great Recession: Lessons for Central Bankers

Jacob Braude
Zvi Eckstein
Stanley Fischer
Karnit Flug
Copyright Date: 2013
Published by: MIT Press
Pages: 392
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  • Book Info
    The Great Recession
    Book Description:

    The recent financial crisis shook not only the global economy but also conventional wisdom about economic policy. After the collapse of Lehman Brothers in September 2008, policy makers reversed course and acted on an unprecedented scale. The policy response was remarkable both for its magnitude and for the variety of measures undertaken. This book examines both the major role central banks played in the crisis and the role they might play in preventing or preparing for future crises. The contributors focus on monetary policy, the new area of macroprudential policy, and issues of exchange rates, capital flows, and banking and financial markets. They look at the experiences of both developed and emerging economies, considering why some, including Israel and Australia, suffered only mild effects while others--Ireland for example--plunged into severe financial crisis.

    eISBN: 978-0-262-30592-1
    Subjects: Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-xii)
  4. Introduction: Central Bank Lessons from the Global Crisis
    (pp. 1-18)
    Stanley Fischer

    During and after the Great Depression many central bankers and economists concluded that monetary policy could not be used to stimulate economic activity in a situation in which the interest rate was essentially zero, as it was in the United States during the 1930s—a situation that later became known as the liquidity trap. In the United States it was also a situation where the financial system was grievously damaged. It was only in 1963, with the publication of Friedman and Schwartz’sMonetary History of the United Statesthat the profession as a whole¹ began to accept the contrary view,...


    • 1 Monetary Policy Frameworks after the Great Financial Crisis
      (pp. 21-50)
      Huw Pill and Frank Smets

      The great financial crisis of the new millennium and its fallout on economic activity has, in the eyes of some observers, raised questions on the appropriateness of the price-stability oriented monetary policy frameworks that, until only a few years ago, were credited with supporting a long period of global nominal and real economic stability. For example, in view of the existence of a lower bound on policy-controlled nominal interest rates and the constraints this implies for active macrostabilization policies, the appropriateness of the pursuit of a small, but positive inflation objective around 2 percent has been challenged.¹ Moreover the neglect...

    • 2 The Role of Monetary Policy in Turkey during the Global Financial Crisis
      (pp. 51-80)
      Harun Alp and Selim Elekdağ

      Distinct features of the global financial crisis that intensified during September 2008 include a sharp slowdown in global economy activity—including severe recessions across many countries—along with an episode of acute financial distress across international capital markets. Another departure from past global downturns was the coordination of unprecedented countercyclical policy responses to the crisis, which seems to have supported the rebound in economic activity.

      Turkey was one of the hardest hit countries by the crisis. Real GDP contracted sharply for four quarters, reaching a year-over-year contraction of 14.7 percent during the first quarter of 2009, resulting in a –4.8...

    • 3 An Assessment of Chile’s Monetary and Fiscal Policy Responses to the Global Crisis
      (pp. 81-96)
      Claudio Soto

      During 2008 to 2009 we witnessed a period of unprecedented financial turmoil that led to a major financial crisis and a global recession. In response, many governments around the world implemented a wide set of countercyclical policies using conventional and nonconventional policy instruments. In this chapter I describe and analyze the fiscal and monetary policies taken by the Chilean authorities to deal with the crisis and the global recession.¹

      The most immediate measures taken by the Central Bank of Chile shortly after the Lehman collapse were intended to provide and ensure liquidity to the banking system. After some weeks of...


    • 4 Central Banks, Macroprudential Policy, and the Spanish Experience
      (pp. 99-122)
      Enrique Alberola, Carlos Trucharte and Juan Luís Vega

      The global financial crisis erupted in a context of financial excesses and an underlying financial fragility fostered by loose economic and financial conditions, low inflation, high-risk appetite, lack of due diligence by some investors, and inadequate regulation and supervision. The magnitude of the damage forced central banks, financial authorities, and many other policy institutions throughout the world to react swiftly in order to mitigate its fallout, a process in which advanced economies, in particular, are still engaged. Moreover the financial origin of the crisis strengthened the commitment of central banks to improve their surveillance and reinforcement of financial stability, a...

    • 5 Tax Policies and Financial Stability: Lessons from the Crisis
      (pp. 123-162)
      Helene Schuberth

      In rejecting the recurring perception that “this time is different,” Reinhart and Rogoff (2009) show that in a historical perspective, financial crises exhibit remarkable parallels in areas such as leverage, the development of assets, and in particular housing prices, growth patterns, and current account deficits. The majority of historical crises were preceded by financial liberalization and deregulation (Kaminsky and Reinhart 1999). And the current financial crisis is again a “no lessons learned” event, given the numerous examples of regulatory forbearance foremost vis-à-vis the growing shadow banking system with its complex securitization-based lending processes and further relaxations of regulatory standards in...


    • 6 Managing Capital Inflows: Old and New Debates
      (pp. 165-186)
      Jonathan D. Ostry

      The recent (sometimes acrimonious) debates over how to manage capital inflows to emerging market countries are hardly “new,” but rather only the latest installment in what remains a highly unsettled issue among both professional economists and policy makers. Think back to the 1930s and 1940s when the two founding fathers of the International Monetary Fund, Lord Keynes and Harry Dexter White, were discussing these issues in crafting their vision for the IMF (and in a little known fact, White even took them up much earlier in his dissertation submitted to Harvard in 1930). And, skipping a few decades, think of...

    • 7 Capital Inflows and Policy Responses: Lessons from Korea’s Experience
      (pp. 187-210)
      Kyuil Chung and Seungwon Kim

      After the late 1990s Asian currency crisis, the main policy framework that Korea adopted combined a free-floating exchange rate system and inflation targeting, together with a widening of financial liberalization. The theoretical background behind this policy scheme was the famous so-called trilemma,¹ which dictates that it is impossible to accomplish exchange rate stability, monetary policy independence, and free capital mobility simultaneously. Given the condition that financial markets in individual countries had been rapidly integrated into the international financial markets since the 1980s,² it seemed that the free-floating exchange rate system and inflation targeting was the best option Korea could choose....

    • 8 Policy Response to External Shocks: Lessons from the Crisis
      (pp. 211-242)
      Carlos Capistrán, Gabriel Cuadra and Manuel Ramos-Francia

      The development of globalization in the last two decades has tightened financial and commercial linkages among economies. A consequence of this development has been a large increase in private financial flows across countries. Already a number of studies have documented that cross-border financial claims and direct foreign investment have experienced a significant growth (Kose et al. 2006), and according to the IMF, the amount of net private capital flowing to emerging economies increased from 90 billion US dollars in 2002 to 600 billion in 2007 (IMF 2010).

      In general, capital inflows to emerging market economies have yielded several benefits for...


    • 9 Lessons from the Financial Crisis: An Australian Perspective
      (pp. 245-268)
      Jonathan Kearns

      The global financial crisis triggered a global recession, so severe it has been called the Great Recession. The recession has been notable not only for its depth in some countries but also for the exceptional degree of synchronization across countries.¹ All except three of the 34 OECD countries experienced two consecutive negative quarters of growth in late 2008 to early 2009, and only two avoided negative year-end GDP growth.² Australia was one of those fortunate countries. This chapter considers whether there are any lessons to be learned from Australia’s experience in the face of such a large external shock. It...

    • 10 Lessons from the World Financial Crisis for the Central Bank of Norway: The Approach to Monetary Policy and Financial Stability
      (pp. 269-306)
      Sigbjørn Atle Berg and Øyvind Eitrheim

      Spillover effects from the emerging liquidity problems in dollar markets affected Norwegian banks adversely already in August 2007, and the escalation of the liquidity problems in September 2008 required immediate intervention by Norges Bank. Like many other small open economies, Norway has also been adversely affected by the global recession that followed the global financial crisis. But in an international perspective, the Norwegian economy and financial institutions have been less affected by the crisis than many other countries and their financial institutions.

      There are still lessons we can learn from this turbulent epoch. Norway’s approach to monetary policy, that of...

    • 11 Israel and the Global Crisis: Events, Policy, and Lessons
      (pp. 307-336)
      Jacob Braude

      The effects of the global crisis on the Israeli economy and its financial system were severe, though less so than in most other developed countries. The evolution over time of the crisis in Israel roughly followed that of the worldwide crisis. Thus, while certain effects were evident even before Lehman’s collapse, the crisis peaked at the end of 2008 and the beginning of 2009, and hesitant recovery began in the second quarter of 2009.

      Several factors helped mitigate the adverse effect of the crisis on the Israeli economy. These included the timing of the crisis, which followed five years of...

    • 12 Prolonged Dislocation and Financial Crises
      (pp. 337-362)
      Frank Browne and Robert Kelly

      The chapter argues that the four peripheral countries in the euro area in which we include Ireland, Spain, Greece, and Portugal, all four of which have already experienced a severe financial crisis or have experienced some financial market turbulence and are seen as being vulnerable to a full blown financial crisis (i.e., Spain), are special among euro area member states in the following sense. They were all coming from economic backgrounds that were characterized by lower standards of living and lower price levels than those that prevailed in the core of the monetary union at the time when they adopted...

  9. Contributors
    (pp. 363-364)
  10. Index
    (pp. 365-380)