Stag-Deflation and Unconvential Monetary Policies in Advanced Economies

Today, the existence of the market-based financial system causes the developments in the banking and capital markets to be separated from each other. This situation caused financial intermediaries to be at the center of financial fluctuations. Leveraged transactions display a structure that coincides with the economic conjuncture and increases with the help of the financial cycle. Financial intermediaries use the leverage to help them grow their balance sheets during the recovery periods of the economy and, on the contrary, to shrink the economy. This behavior is an element that increases the harmful effects of cyclical fluctuations. In the Global Financial Crisis, financial institutions' efforts to rapidly reduce leveraged positions led to the emergence of funding liquidity in the markets. Along with the emergence of funding liquidity and the stagnation that emerged, it caused banks to review their credit portfolios and at the same time, a decrease in loans was observed with the effort to reduce their risks. The decrease in demand caused by the worries of recession led to deflation. This situation led to Fisher-type debt deflation. This situation led to stag-deflation. In this case, the central banks of developed countries lowered their interest rates to a level of zero or even below, and this situation caused the central banks to be caught in the liquidity trap. In this case, the central banks intervened in the economy with unconvential monetary policy instruments