The Impact of the Great Recession on Monetary and Fiscal Policy in Developed Market Economies

Abstract

Background: With the occurrence of the crisis in 2007, which caused the largest economic contraction since the Great Depression in the thirties, it has become evident that the previous understanding of strategies, effects and roles of monetary and fiscal policy should be redefined. Objectives: The aim of this paper is to illustrate a possible expected change in monetary and fiscal policy in developed market economies that could occur as a consequence of the Great Recession. Methods/Approach: The paper provides a comparative analysis of various primary economic variables related to the developed OECD countries, as well as the empirical testing of the selected theoretical assumptions. Results: The changes in monetary policy refer to the question of raising target inflation, considering a possible use of aggregate price level targeting and paying attention to the role of central banks in suppressing the formation of an asset bubble. The success of fiscal policy in attaining stabilization depends on the size of possible fiscal measures and creation of automatic stabilizers. Conclusions: For the most part, monetary and fiscal policies will still stay unchanged, although some segments of these policies need to be improved.

Do Fiscal Rules Constrain Fiscal Policy in Romania?

“…Feraru concluded that a justification for the pro-cyclicality observed is that tax authorities can engage in promoting an anti-cyclical tax policy, but they do not have adequate information on current cyclical conditions, real-time indicators associated with the economic cycle are subject mainly due to the significant uncertainty of estimates of potential GDP revisions [16]. D. Šehović analyzed the impact of the large recession on fiscal and monetary policy in developed market economies [17].…”

How Does a Welfare State achieves Fiscal Sustainability? A Study of the Impact of Tax Equity

“…However, recently developed countries have guaranteed the independence of the Central Bank in order to prevent inflation risks arising from the arbitrary use of monetary policy. Thus, the importance of monetary policy and inflationary taxation on fiscal soundness has weakened [26]. Especially in the case of European Union countries, it is argued that monetary policy cannot be utilized in accordance with the reality of each country, and thus, it is further argued that there is a limit to the guarantee of financial stability [13,26].…”

“…As confidence in monetary policy weakened following, the influence of fiscal policy began to be emphasized [26]. The most important variable is the aging population.…”