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How to Create a Depression January 18, 2012

Posted by proeconomia in Fiscal policy, Main, Monetary policy, News on Greece, On the crisis, Opinion.
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A strong article by Martin Feldstein @ Harvard, and former advisor to President Reagan and former president of the NBER. Worth your time reading it. There are several things worth noting, such as the demand-side problem of the current situation and the distinction between structural and cyclical deficits. Here is an interesting excerpt:

 

“While that response implies a higher budget deficit, automatic fiscal stabilizers are particularly important now that the eurozone countries cannot use monetary policy to stabilize demand. Their lack of monetary tools, together with the absence of exchange-rate adjustment, might also justify some discretionary cyclical tax cuts and spending increases.

Unfortunately, several eurozone countries allowed fiscal deficits to grow in good times, rather than only when demand was weak. In other words, these countries’ national debt grew because of “structural” as well as “cyclical” budget deficits.”

 

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