Phillips Lecture – Why Some Times are Different: Macroeconomic Policy and the Aftermath of Financial Crises

40 Pages Posted: 7 Dec 2017

See all articles by Christina D. Romer

Christina D. Romer

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

David H. Romer

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2018

Abstract

Analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises. This paper examines the role that macroeconomic policy plays in explaining this variation. We find that the degree of monetary and fiscal policy space prior to financial distress—that is, whether the policy interest rate is above the zero lower bound and whether the debt‐to‐GDP ratio is relatively low—greatly affects the aftermath of crises. The decline in output following a crisis is less than 1% when a country possesses both types of policy space, but almost 10% when it has neither. The difference is highly statistically significant and robust to the measures of policy space and the sample. We also consider the mechanisms by which policy space matters. We find that monetary and fiscal policy are used more aggressively when policy space is ample. Financial distress itself is also less persistent when there is policy space. The findings may have implications for policy during both normal times and periods of acute financial distress.

Suggested Citation

Romer, Christina D. and Romer, David H., Phillips Lecture – Why Some Times are Different: Macroeconomic Policy and the Aftermath of Financial Crises (January 2018). Economica, Vol. 85, Issue 337, pp. 1-40, 2018. Available at SSRN: https://ssrn.com/abstract=3083174 or http://dx.doi.org/10.1111/ecca.12258

Christina D. Romer (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4317 (Phone)
510-642-6615 (Fax)

National Bureau of Economic Research (NBER)

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United States

David H. Romer

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-0822 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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