Showing posts from May, 2010

Book Review: The Holy Grail of Macroeconomics

The Holy Grail of MacroEconomics: Lessons From Japan's Great Recession, by Richard Koo, talks aboun the macroeconomic lessons that can be learnt from Japan Recession and applied to the US Great Depression.

Interesting Points:
1) Japan's Recession is due to balance sheet recession. A balance sheet recession is one whereby the private firms seek to pay down debt and stops investment. These scenario arises out from the huge debt owned by the firms due to the huge decline in asset prices and the large leverage the firms have used to purchased the assets at a high price during the bubble stage.

2) In a balance sheet recession, monetary policy become ineffective as firms will not borrow regardless how low the interest rate becomes.

3) Only expansionary fiscal policy is effective in balance sheet recession. Given the fall in investment, it is up to the government to increase spending and prop up the GDP.

4) If the government choose to cut its government spending (due to the wish to reduc…