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Fiscal and Financial Responses to the Economic Downturn

Published online by Cambridge University Press:  26 March 2020

Ray Barrell  and
Dawn Holland
Ray Barrell*
Affiliation:
National Institute of Economic and Social Research
Dawn Holland*
Affiliation:
National Institute of Economic and Social Research
*
E-mail: r.barrell@niesr.ac.uk
E-mail: d.holland@niesr.ac.uk
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Abstract

The financial crisis that started in the summer of 2007 and worsened in the autumn of 2008 has involved a repricing of risk and a reduction in the level of potential output in the OECD of between 3 and 5 per cent. In addition it has caused a major recession, leaving output gaps in the UK, the US and the Euro Area currently standing at 3 to 5 per cent of potential GDP despite active policy responses. We show that monetary policy (and especially quantitative easing) has increased output growth in the US and the UK by half a per cent in 2009, and will do the same in 2010Q1. Fiscal policy is also shown to have been effective, but we argue that more could have been done if unfounded worries about excess borrowing had not arisen.

Keywords

Financial crisespotential outputfiscal policymonetary policyquantitative easingG28E44E52E62
Type
Research Articles
Information
National Institute Economic Review , Volume 211 , January 2010 , pp. R51 - R62
Copyright
Copyright © 2010 National Institute of Economic and Social Research

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Footnotes

∗

We would like to thank our colleagues Ian Hurst and Simon Kirby for their input into this note, and Martin Weale for his comments.

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