Counter-Cyclical Economic Policy

OECD Economics Department Working Paper No. 760

102 Pages Posted: 14 May 2010 Last revised: 2 Oct 2010

See all articles by Douglas Sutherland

Douglas Sutherland

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Peter Hoeller

Organization for Economic Co-Operation and Development (OECD)

Balázs Égert

Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute); Université Paris X Nanterre - Department of Economics; William Davidson Institute

Oliver Roehn

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 5, 2010

Abstract

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.

Keywords: Macroeconomic Policy, Financial Sector Regulation

JEL Classification: E61, G28

Suggested Citation

Sutherland, Douglas and Hoeller, Peter and Egert, Balazs and Roehn, Oliver, Counter-Cyclical Economic Policy (May 5, 2010). OECD Economics Department Working Paper No. 760, Available at SSRN: https://ssrn.com/abstract=1604410 or http://dx.doi.org/10.2139/ssrn.1604410

Douglas Sutherland (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

Peter Hoeller

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Balazs Egert

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Université Paris X Nanterre - Department of Economics

Nanterre Cedex, 92001
France

William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Oliver Roehn

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschingerstr. 5
Munich, DE-81679
Germany

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