The Great Recession Fiscal and Monetary Policies

Topic: Economics
Words: 1752 Pages: 6


A recession is a downturn in business activity that affects the entire economy and lasts for more than six months. It manifests itself in a decrease in production volumes, a reduction in household incomes, and an increase in unemployment. To better understand the essence of this phenomenon, one needs to dive into economic theory. In recent decades, economists have adhered to the concept of undulating economic development. According to Meng (2018), the economy goes through certain cycles in its development. It is impossible to predict when this or that phase will begin and how long it will last. For many years in a row, the economy can grow steadily and then, for some reason, begin to fall.

The main indicator of the recession is GDP – the total value of all goods and services produced in the country. Every month, quarter, and year, experts assess the level of GDP and compare it with the previous reporting period. If it is steadily declining, then the economy is experiencing a recession. The recession has a particularly strong impact on ordinary consumers (Meng, 2018). As a result of the reduction of industrial production, unemployment arises. People tighten their belts and start buying less. Demand is falling, and businesses are forced to cut costs or close – this only exacerbates unemployment.

All the economies of the world, even the most developed ones, pass through recession. However, in the absence of adequate measures to stabilize the situation, the recession can drag on and lead to disastrous consequences. A prolonged recession is called depression by analogy with a mental illness. This condition is characterized by a serious decline in the quality of life of the population, a critical level of unemployment, and an increase in social tension, which may eventually escalate into conflict.

Before a recession or at some stage of it, the economy may go into a state of stagnation. Unlike a recession and its kind of depression, when there is a negative but a change in macroeconomic indicators, during stagnation for a long period of time, there is a stagnation of production and trade; that is, the indicators stand still or remain close to the values for previous periods. The nature and causes of recessions are both obvious and uncertain. Recessions, in fact, are a set of failures in economic processes that are implemented simultaneously (Meng, 2018). The reasons for the recession may be a reduction in consumer demand, a reduction in business supply, or a negative shock to the global market. A recession can be triggered by a financial crisis or, as seen in 2020, an epidemiological crisis.

Fiscal and Monetary Policies

Economic policy is a rather capacious concept. It includes many areas dealing with the regulation of certain aspects of the economic life of the country. The structural and sectoral economy maintains the necessary proportions. Antimonopoly fights for fair competition and also provides access to resources to all segments of the population. The financial policy deals with the distribution of monetary savings, depending on the goals and tactical objectives of the country. The investment policy of the state deals with the issues of investing money, large-scale construction, modernization, and innovation. The collection of mandatory payments in favor of the state budget is regulated by tax and customs policy. The very formation of the budget, the accumulation of funds, and their targeted use are regulated by the budget policy of the state.

In the context of the impending economic downturn in Western countries, discussions on the most effective anti-crisis policy instruments have revived. The review analyzes the approaches of Western analysts to the problem of the advantages and disadvantages of two main types of government policy – monetary and fiscal, as well as the features of U.S. monetary policy and factors limiting the use of monetary and fiscal instruments in the modern economy.

The state fiscal policy is related to the regulation of expenditures and incomes of the country in order to solve certain socio-economic problems. In the modern world, this is achieved by maintaining an acceptable level of unemployment, curbing inflation, and crisis management. In ancient times, a basket was called a fisk; over time, this word began to be used to refer to the state treasury (Kasasbeh, 2021). That is, fiscal policy, in fact, deals with the distribution of state budget funds.

Depending on the stage of the cycle, the state may apply a policy of stimulation or deterrence. The first is used for depression and recession, aimed at the development of investment and entrepreneurship, the fight against unemployment, and ensuring the interests of socially vulnerable segments of the population. The policy of containment is applied to avoid overheating of the economy. The tax system allows accumulating the necessary amount of funds to solve strategic and tactical goals. The budget policy deals with the distribution of funds and their redistribution between individual business entities. Fiscal policy can manipulate tax rates, transfer payments, and the volume of public works (Kasasbeh, 2021). The automatic fiscal policy operates on the basis of built-in economic stabilizers. That is, the economy is able to stabilize under any cyclical events, regardless of the actions of the government.

Monetary policy is carried out jointly by the Government and the Central Bank. It is implemented in order to stabilize the economy and ensure its growth and development. It is part of the overall macroeconomic course of the country, implemented through the use of various tools and methods, depending on the goals pursued (Twinoburyo & Odhiambo, 2018). The essence of monetary policy is the state’s manipulation of monetary relations.

The economic goals are achieved by using instruments to increase or decrease the money supply by changing the volume of output, as well as taking measures to change interest rates. As a result, it becomes possible to attract investments, change pricing policy, increase the supply of products, and maintain an adequate level of employment. Monetary policy can be used to stimulate certain sectors of the national economy by providing preferential rates on loans and changing the volume of the money supply (Twinoburyo & Odhiambo, 2018). A tight monetary policy is engaged in introducing restrictions and restraining the growth of money, which makes it possible to restrain dangerous inflationary processes (Chapman, 2020). The cyclical nature of the economy requires the use of stimulating or restraining monetary policy. The incentive reduces interest rates, as well as the purchase of state assets from the open market, and the volume of reserve requirements decreases. The restraining policy is aimed at reducing the volume of the money supply. Thus, the fiscal and monetary policy of the state is applied to maintain the functioning of the national economic system to ensure its stability and independence from existing factors.


The global financial crisis of 2007-2008 was characterized by its premature spread on an unprecedented scale: it captured almost all countries of the world, and it is even compared with the Great Depression of the 1930s. The economy can be stable under the so-called natural unemployment rate if inflation is controlled by independent central banks and the budget is balanced. The macroeconomic attitudes of this policy were dominant until the global crisis of 2008. Monetary policy failed to foresee and prevent the Great Recession of 2008, as well as to create conditions for a full recovery after the crisis. In many countries, the average real incomes of the population are still lower than before the financial crisis. The disappointment in monetary policy comes amid recognition of the positive results of President Barack Obama’s expansionary fiscal measures in 2008 and the negative consequences of European anti-crisis fiscal tightening programs.

For the first time, the idea of the need to consider the interaction of fiscal and monetary policy was raised in his famous work by Nobel laureate Thomas Sargent and his colleague Neil Wallace. They showed that even if the central bank is institutionally independent of the government, it cannot pursue an independent monetary policy, for example, a tight monetary policy, in order to maintain low inflation if, in turn, the government does not solve problems related to the budget deficit and public debt.

If the central bank reduces the growth rate of the money supply and increases interest rates, then this leads to the fact that the so-called seigniorage, or inflation tax, the income that the government receives from the implicit taxation of nominal values at the inflation rate, decreases. This means that the government has a need to increase debt financing with constant government spending and taxes (Chapman, 2020). The national debt will grow and the central bank, of course, even if it is independent of the government, cannot consider the public debt market as a market that it is completely uninterested in. The public debt market is very important for the stability of the country’s financial system.

As a result, the unstable growth of public debt may force the central bank to abandon the policy of strict regulation of the money supply and increase seigniorage, which, as a consequence, will lead to an increase in inflation. Thus, given the imbalance of the fiscal sphere, low inflation today can only be achieved at the cost of higher inflation in the future. Being on the periphery of the stabilization arsenal from the point of view of the new neoclassical synthesis, stimulating fiscal policy in practice was used almost everywhere in most countries facing the crisis in 2008-2009.

Considering the fiscal policy regimes in developed economies during the Great Recession, it is advisable to first turn to the dynamics of income and expenditure of the national budgets. Almost everywhere, with the exception of Japan, the relative growth of budget expenditures in 2009 is clearly visible (for example, in the USA – from 37 to 42% of GDP, in the eurozone – from 46 to 50.5% of GDP), with their subsequent decline or stabilization at a new level (IMF Fiscal Monitor, 2015). Reducing fiscal stimulus in the leading countries against the background of global instability in the pace of post-crisis recovery serves as an additional characteristic of the peculiarities of fiscal policy during the Great Recession. The phase of active budget expansion was followed by a period of consolidation. In conclusion, in developed countries, the potential of traditional monetary policy measures was quickly exhausted, so non-standard monetary instruments and large-scale packages of discretionary fiscal stimulus played a key role in the anti-crisis programs of leading economies (Chapman, 2020). Above mentioned approaches helped the world economy to restore its growth and reduce unemployment.


Chapman, G. O. (2020). Comparison of Monetary Policy Actions: UK, Japan, and USA During the Financial Crisis of 2008. SCMS Journal of Indian Management, 17(1), 5-15. Web.

Kasasbeh, O. (2021). Fiscal Policy and its Relationship with Economic Growth a Review Study. Available at SSRN 3789109. Web.

Meng, S. (2018). How to build an economy free of recession and stagnation: results from a multi-commodity macro model. Theoretical & Applied Economics, 25(2). Web.

Twinoburyo, E. N., & Odhiambo, N. M. (2018). Monetary policy and economic growth: A review of international literature. Journal of Central Banking Theory and Practice, 7(2), 123-137. Web.

IMF Fiscal Monitor. (April, 2015). Now Is the Time: Fiscal Policies for Sustainable Growth. Washington, D.C. IMF.

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