Thursday, January 29, 2009

Advice for Avoiding a recession

Readers Question: Can you avoid a recession?

If there is a lack of aggregate demand in the economy You can try various policies to boost demand.

  • Fiscal policy (higher spending, lower taxes - The principle is that government borrow to offset the rise in private sector spending)
  • Monetary policy (lower interest rates)
  • Quantitative easing - increasing money supply. This may be necessary if the recession is so severe it creates deflation. Deflation has a powerful negative impact on consumer spending and economic growth

If the fall in demand is moderate, these policies may be successful in boosting demand and avoiding a recession. However, if the downturn is severe. If it is caused by:

  • falling house prices / assets
  • Credit crisis leading to fall in bank lending
Then it is much more difficult to avoid a recession, because these create powerful decreases in economic activity. In this case the government can only minimise the depth and length of the recession. There are also significant time lags in these policies working

Because the recession still occurs, people may reason that these policies have failed. But, the recession may have been even deeper if the policies had not been implemented

1 comment:

David said...

Why does there need to be a debt based economy ?