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Class Year

2011

Abstract

This paper uses two different samples to study the effects of monetary and fiscal policies on the profiles of recessions and recoveries. Several results emerge from the econometric analysis presented. First, monetary policy during ordinary recessions and banking crises is a powerful tool with lasting effects that extend to recovery growth rates. However, the effect of monetary policy during financial crises is strongly diminished in the case of forbearance – banks left to function despite being technically insolvent. Second, the effectiveness of fiscal policy is reversed – it is a powerful tool during banking crises, but it does not seem to significantly affect recovery growth rates during ordinary recessions. Finally, the policy response during past financial crisis does not seem to be particularly expansionary – on the contrary, fiscal policy is markedly procylcical, while monetary policy is neutral. This is proposed as an alternative explanation to the one usually given for the sluggishness of financial crises.

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