June, 2010

Failed Interventions: The Increasing Ineffectiveness of Monetary and Fiscal Policies in High-Debt Environments

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Macroeconomic stabilization policies are implemented to smooth the real effects of periodically recurring business cycles. However, since empirical evidence proves that economic policy can itself confer negative costs onto societies, the effectiveness of monetary and fiscal policies is often questioned. Of crucial importance today, increasing public and private debt levels pose huge challenges for policy implementation. As such, this thesis utilizes post-recession stabilization experiences in the United States since the 1970s, with particular emphasis on the reflationary efforts of the current economic crisis, and looks to other countries that have high sovereign debt levels who have gone into or are approaching bankruptcy to illustrate that the sustained use of monetary and fiscal policies in increasing high public- and private-debt environments further frustrate the ability of macroeconomic stabilization to steady economic activity.