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The U.S. economy is stuck in a painfully slow recovery. Neither the accommodative monetary policy nor the fiscal stimulus has catalyzed a strong recovery. We explore why, and indicate a feasible path to robust growth. We first assess the normal impact of monetary policy on the course of an economic cycle. We then consider a number of factors that distinguish the Great Recession from the typical economic cycle, with a view toward identifying important causes of the recession, but also in order to determine the factors that have limited the impact of monetary policy and impeded recovery from the recession. Finally, by examining comparable financial crises and balance sheet recessions in other countries, we present evidence that fiscal consolidation and the resulting exchange rate depreciation is an effective response to these crises, and is more likely than a program of government stimulus to generate a robust recovery.


Working Paper 12-03



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