Macroeconomics of Growth Cycles and Financial Instability
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Macroeconomics of Growth Cycles and Financial Instability

Piero Ferri

In light of the recent economic crisis and in keeping with Hyman Minsky’s analysis of financial instability, this book considers the important interaction between cycles and growth, via the interplay between demand, supply and real-world financial issues.
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Chapter 7: Policies versus Self-Adjustment

Piero Ferri


1. A NEW GREAT DEPRESSION? The present slump seems to be more severe than any of the past recessionary experiences that have occurred since World War II. The interaction between financial and real aspects on a world scale has certainly contributed to this result. It is quite natural to make a comparison with the Great Depression. This remains the most severe recession on record in many industrialized countries. In order to compare the current crisis with the Great Depression, it is useful to consider initial conditions, transmission and policy responses, as suggested by the IMF (2009). Some points are worth stressing. Firstly, the intensity of the production fall in the two crises has been very similar. Ten months after the peak, production fell by 12 per cent in both episodes. The difference afterwards was, however, dramatic: in fact, it fell for 35 months in the former, while it has shown signs of relief in the present situation. Secondly, unemployment rose to 25 per cent in the period 1929–33, while it has stayed around 10 per cent in the period 2007–09. Finally, while losses on household assets were about 3 per cent in the previous episode, in the current crises they have reached 17 per cent (see also Alumnia et al., 2009). Beyond statistical differences, it is important to stress two aspects. Firstly, although the epicentre of the crisis was in both cases the United States, the international situation was very different. Secondly, the policy responses during the two...

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