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

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  • Richard C. Koo

Abstract

type="main" xml:id="geer12028-abs-0001"> 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.

Suggested Citation

  • Richard C. Koo, 2014. "It Is Private, Not Public Finances that Are Out of Whack," German Economic Review, Verein für Socialpolitik, vol. 15(1), pages 166-190, February.
    • Handle: RePEc:bla:germec:v:15:y:2014:i:1:p:166-190
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    File URL: http://hdl.handle.net/10.1111/geer.2014.15.issue-1
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    Cited by:

    1. Campiglio, Emanuele, 2016. "Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy," Ecological Economics, Elsevier, vol. 121(C), pages 220-230.
    2. repec:ecb:ecbops:2010161 is not listed on IDEAS
    3. K. Mc Morrow & F. Orlandi & R. Raciborski & W. Roeger & V. Vandermeulen & J. in’tVeld & L. Vogel, 2016. "Medium term economic dynamics of the Euro Area," International Economics and Economic Policy, Springer, vol. 13(1), pages 27-43, January.
    4. Raffaele Fargnoli, 2020. "Adapting the EU Fiscal Governance to New Macroeconomics and Political Realities," RSCAS Working Papers 2020/03, European University Institute.
    5. Martin Gächter & Martin Geiger & Florentin Glötzl & Helene Schuberth, 2015. "Sectoral Deleveraging in Europe and Its Economic Implications," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-23.
    6. Bindseil, Ulrich & Domnick, Clemens & Zeuner, Jörg, 2015. "Critique of accommodating central bank policies and the 'expropriation of the saver' - A review," Occasional Paper Series 161, European Central Bank.
    7. van Riet Ad, 2019. "Monetary Policy and Unnatural Low Interest Rates: Secular Stagnation or Financial Repression?," Review of Economics, De Gruyter, vol. 70(2), pages 99-135, August.

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