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Balance Sheet Recession and Debt Financing

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  • Dedák, István

Abstract

This paper addresses some macroeconomic aspects of the debt crisis and debt financing. The paper concludes that, in a recession, it is not possible for all economic agents to deleverage at the same time. For that reason, in order to break out of balance sheet recession, developed countries hit by the crisis should retain low interest rates while adopting fiscal policies which, allowing for national differences, should be overall expansive. An economic policy focussing on general fiscal austerity and a strong reduction in public debt should only follow a strong upswing in activity. In our analysis of the fiscal multiplier, we explain that the value of the multiplier is far higher in a liquidity trap and in a global crisis than in a cyclical upturn and that, surprisingly, the multiplier increases in line with the average tax rate. With regard to debates on economic policy in Hungary, the paper is primarily concerned with debt financing, in particular, with a comparison of central bank financing and international borrowing. The analysis concludes that, if the international facility is used to refinance debt denominated in the national currency, then an IMF loan is not cheaper and is not of a smaller inflation risk than central bank financing, and essentially has nothing to offer that the central bank’s quantitative easing could not achieve.

Suggested Citation

  • Dedák, István, 2013. "Balance Sheet Recession and Debt Financing," Public Finance Quarterly, Corvinus University of Budapest, vol. 58(1), pages 76-94.
  • Handle: RePEc:pfq:journl:v:58:y:2013:i:1:p:76-94
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    File URL: https://unipub.lib.uni-corvinus.hu/8964/
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    References listed on IDEAS

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    1. Alan S. Blinder, 2010. "Quantitative easing: entrance and exit strategies," Review, Federal Reserve Bank of St. Louis, vol. 92(Nov), pages 465-480.
    2. Alan S. Blinder, 2010. "Quantitative easing: entrance and exit strategies," Review, Federal Reserve Bank of St. Louis, vol. 92(Nov), pages 465-480.
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    Cited by:

    1. Novák, Zsuzsanna & Vámos, Imre, 2014. "Central Bank Profitability and Budget Deficit," Public Finance Quarterly, Corvinus University of Budapest, vol. 59(4), pages 492-510.

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    More about this item

    Keywords

    balance sheet recession; fiscal policy; multiplier effect; quantitative easing; IMF;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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