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

Author

Listed:
  • Koo Richard C.

    (Nomura Research Institute, Otemachi Financial City Grand Cube, 1-9-2 Otemachi, Chiyoda-ku,Tokyo100-0004, Japan)

Abstract

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

  • Koo Richard C., 2014. "It Is Private, Not Public Finances that Are Out of Whack," German Economic Review, De Gruyter, vol. 15(1), pages 166-190, February.
    • Handle: RePEc:bpj:germec:v:15:y:2014:i:1:p:166-190
    DOI: 10.1111/geer.12028
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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.

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