Counter-Cyclical Economic Policy
Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)
Organization for Economic Co-Operation and Development (OECD)
Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Université Paris X Nanterre - Department of Economics; William Davidson Institute
Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
May 5, 2010
OECD Economics Department Working Paper No. 760
What changes are needed to make counter-cyclical economic policy more effective in the aftermath of the recent crisis? An important lesson from the severity of the recent recession is that policy in various areas will have to be more prudent during upswings and to build in greater safety margins to be able to react to large adverse shocks. In the period leading up to the crisis, cycles became more synchronised, while asset prices became more volatile. Recent events also underline the difficulties encountered in detecting and reacting to asset price misalignments. The confluence of the turn in asset prices, financial market crisis and slump in trade challenged the ability of counter-cyclical policies to cope with the severe downturn, although experience reveals that countries where the fiscal position was sound and inflation under control were better able to cushion the shocks. Furthermore, robust micro-prudential regulation can help the financial sector withstand shocks. In this light, existing policies should be strengthened to ensure that there is room for manoeuvre going into a downturn. In order to deal with similar shocks in the future, macroeconomic and financial sector policies should consider precautionary policy settings and macro-prudential regulation to address systemic threats to stability.
Number of Pages in PDF File: 102
Keywords: Macroeconomic Policy, Financial Sector Regulation
JEL Classification: E61, G28working papers series
Date posted: May 14, 2010 ; Last revised: October 2, 2010
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