University of Cambridge > Talks.cam > Land Economy Seminar Series > Economic Policy in Asset and Deflation Cycles.

Economic Policy in Asset and Deflation Cycles.

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In the last ten years or so business cycles are no longer demand- or supply-led, but asset-led driven by excessive liquidity. This liquidity has been created gradually by financial liberalisation and financial engineering and has financed a series of bubbles, such as the internet (2000), housing (2007) and commodities (2008). As the ramifications of the burst of these bubbles is a recession, major central banks, such as the Fed and the Bank of England, have responded not only by cutting interest rates, but also by printing money, which euphemistically has been called ‘quantitative easing’. Advocates of these policies have pointed out the risk of deflation, whereas critics have concentrated on the risk of inflation, at least in the long run. This paper examines the validity of these views and goes one step further in arguing that such policies lead to economic instability, namely business cycles of ever increasing amplitude, in which each recession is worse than the previous one and requires more quantitative easing. A simple model is used to illustrate this instability and suggests how monetary policy should be formulated to restore economic stability.

This talk is part of the Land Economy Seminar Series series.

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