Monetary Policy Impotent During A Balance Sheet Recession

Koo uses a century of history to show that when the corporate and household sectors are striving to reduce debt and rebuild balance sheets, monetary prods cease to stimulate spending. The payback period is both painful and essential:

“…one of the key characteristics of a balance sheet recession…is that monetary policy becomes useless. People in Japan have already experienced this first-hand: monetary policy had no effect, even though interest rates remained at our near zero from 1995 to 2005. The stock market did not rally, and the economy did not recover. In contrast, the late 1980s asset-price bubble happened when the official discount rate stood at 2.5 percent. Yet just a few years later, in February 1993, the same policy rate of 2.5 percent had no stimulative impact whatsoever. Nor, subsequently, did an interest rate of 0 percent.”

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