Demand-Side Policies And The Great Recession Essay Example

Introduction

The recession is a decline in production, characterized by zero growth in gross national product (GNP) or falling for more than six months. The recession is one of the phases of the economic cycle, following after the boom, and is replaced by depression.
In general, the recession means a slowdown in economic growth and decline of production processes, resulting in a zero growth or uncritical, a moderate decline in gross national product (GNP) and gross domestic product (GDP) - the main indicators of the overall economic condition of the country. The recession may be caused by a number of reasons, including non-economic. Prerequisites recession may be of a political nature (up to military action), and psychological, when the growing uncertainty and lack of confidence of investors. But in most cases, the recession is still a consequence of sudden unplanned changes in the economy and market conditions.
However, it is worth noting that the recession economy experts do not regard as an absolute evil. This is just one of the phases of the economic cycle, always following the boom in the economy. Greatly prolonged recession could go into a depression, but true state actions aimed at preventing depressive state of the economy, the recession could be the impetus for improving it. Active capital injections from the state budget are the only possible way is more or less painless to overcome the recession.

Fiscal Policy

Expansionary fiscal policy is used in a recession, aims at reducing the recessionary output gap and reducing unemployment and aims to increase aggregate demand (total expenditure). Its instruments are: a) an increase in government procurement; b) tax cuts; c) an increase in transfers. Contractionary fiscal policy is used for the boom (in case of overheating of the economy), aims at reducing inflation and the output gap and inflation reduction is aimed at reducing aggregate demand (total expenditure).
Value Added Tax (VAT) provides integrated stability follows. When recession sales declining, and since VAT is an indirect tax, part of the price of the goods, the fall in sales tax revenues from indirect taxes (withdrawal from the economy) are reduced. In case of overheating, on the contrary, as the growing total revenue, sales volume increases, which increases revenues from indirect taxes. Economy is automatically stabilized.
With regard to unemployment and poverty, the total amount of their payments increased by recession (to the extent that, as people begin to lose their jobs and get poorer) and contract with the boom, when there is "overemployment" and revenue growth. (It is obvious that in order to receive unemployment benefits, you must be unemployed, and to receive poverty benefits, you have to be very poor). These benefits are transfers, ie injections into the economy. Their payment promotes income and hence costs, which stimulates economic growth during a recession. A reduction in the total amount of these payments when the boom has a moderating effect on the economy.

In developed countries, the economy 2/3 adjusted using discretionary fiscal policy and 1/3 - by the action of automatic stabilizers.

Monetary Policy
There are two types of monetary policy: 1) facilitating and 2) deterrent.
Expansionary monetary policy is conducted during the recession and has the aim of "recovery" of the economy, stimulating the growth of business activity in order to combat unemployment restraining monetary policy conducted during the boom, and is aimed at reducing business activity in order to combat inflation.
Expansionary monetary policy is to hold the central bank measures to increase the supply of money. Its instruments are: 1) reduction in the rate of reserve requirements, 2) decrease in the discount rate of interest, and 3) the central bank buying government securities. Contractionary (restrictive) monetary policy is the use of central bank measures to reduce the money supply. These include: 1) the increase in the rate of reserve requirements, 2) increasing the discount rate percent and 3) the sale of the central bank of government securities.

The benefits of monetary policy are:

• No internal lag. Internal lag is a period of time between the moment of awareness of the economic situation in the country and the time of the adoption of measures to improve it. The decision on the purchase or sale of government securities by the central bank adopted quickly, and since these securities in developed countries highly liquid, risk-free and highly reliable, the problems with their sale to the public and banks do not arise.
• Lack of effect of repression. Unlike stimulative fiscal policy stimulating monetary policy (money supply growth) causes reduced interest rate that does not lead to displacement and to stimulate investment and other sensitive to changes in interest rates independent expenditures and multiplicative increase in output.
• The multiplier effect. Monetary policy, as well as fiscal policy, has a profound impact on the economy, and are two of the multiplier. Money multiplier provides a process for the expansion of the deposit, ie multiplicative increase in the money supply and the growth of autonomous expenditure by reducing the rate of interest in terms of growth of the money supply is multiplicative (with the multiplier effect of autonomous expenditure) increases the value of total output.

Disadvantages of monetary policy are as follows:

• Ability to inflation. Expansionary monetary policy, ie, the growth of the money supply leads to inflation, even in the short-term, and even more so in the long run. Therefore, representatives of the Keynesian claim that monetary policy can only be used in case of overheating (inflation gap) of the economy, ie, consider the possibility of restrictive monetary policy only, while the recession, according to them, should be used Expansionary fiscal rather than monetary policy.
• The presence of an external lag due to the complexity and possible failures in monetary transmission mechanisms. External lag represents the time of the adoption of measures to stabilize the economy (decision by the central bank to change the value of the money supply) until the appearance of the result of their impact on the economy (which is reflected in the extent of release). Buying and selling by the central bank of government securities is carried out quickly, i.e. rapidly changing lending capacity of commercial banks. However, the transmission mechanism of monetary long and consists of several stages, each of which can fail.

Conclusion

Since late 2008, the Federal Reserve moved to stimulate the economy by using non-traditional instruments of monetary policy, in particular by providing the economy with additional liquidity through repurchase of various assets (Treasury bonds and mortgage agencies). The application of these measures, which have caused a significant expansion of the Fed's balance sheet, in varying degrees, affected all spheres of economic and financial activity in the US.
Thanks to the loose monetary policy, the Fed has managed to achieve its interim objective of reducing the general level of interest rates in the economy, including interest rates on long-term financial instruments. Reduced rates observed for a wide range of tools, not limited to the tools that are directly involved in the programs the Fed to repurchase securities. Despite the fact that the most significant decrease in Treasury yields to the period between rounds of quantitative easing, studies show that in the absence of measures taken by the yield on these instruments would be placed today at much higher levels.

References

Fried, Joseph, Who Really Drove the Economy into the Ditch? (New York, NY: Algora Publishing, 2012) ISBN 978-0-87586-942-1.
Demyanyk, Yuliya (FRB St. Louis), and Otto Van Hemert (NYU Stern School) (2008) "Understanding the Subprime Mortgage Crisis," Working paper circulated by the Social Science Research Network.
Reinhart, Carmen M., and Kenneth Rogoff (2008) "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Harvard University working paper.
Gold, Gerry, and Feldman, Paul (2007) A House of Cards – From fantasy finance to global crash. London, Lupus Books. ISBN 978-0-9523454-3-5