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Keynes and Recession

Keynes and Recession. Dr Maurice Mullard Lecture 5. Financial Crisis . Global Economy experience 122 financial crisis since 1945 UK Experienced 8 recessions USA 7 since 1950 Definition of recession fall in GDP for two quarters

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Keynes and Recession

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  1. Keynes and Recession Dr Maurice Mullard Lecture 5

  2. Financial Crisis • Global Economy experience 122 financial crisis since 1945 • UK Experienced 8 recessions USA 7 since 1950 • Definition of recession fall in GDP for two quarters • Most recessions start in financial sector banking crisis or housing bubble • Recovery takes about 5 years see work Reinhart and Rogoff also IMF website

  3. Explaining Present Recession • Thesis of a Savings Glut too much global savings not enough investment opportunities • Savings mainly China and Emerging Economies • Buying US Treasury kept interest rates low • Assumptions about house prices • Repairing lost savings

  4. Austerity Debate • Public Sector deficits are unsustainable • Treasury bonds lower interest rates • Liquid markets saying there is no problem in funding deficits • Is Reducing the deficit an issue of ideology or economic necessity

  5. Keynes on the paradox of thrift • Savings and Investment • Savings higher than investment • Saving as individual issue and the collective decision • Declining aggregate demand • Stimulus packages • Infrastructure expenditure as improving capital

  6. Capital Expenditure • Example of China stimulus plan improving communications • US stimulus tax reductions • UK expenditure on capital projects • Recession is this a • V • L • W • U

  7. V Type Recession • Temporary blip soon return to normal path of growth • Structure of Economy is sound • Unemployment is voluntary • Prick the bubble of housing • Problem is now recession is in third year • UK forecast growth 0.5 per cent • Destruction of GDP equivalent to 5 per cent

  8. L Shaped Recession • We shall stay in recession for a long period • Problem of structure • Too much reliance on financial sector • Need to find new growth sectors • Exports to china and India • Global imbalances • EU in recession as well as USA

  9. W Shaped recession • Forecast that we had recession in 2007 and we shall have a new recession in 2011 • Hurricane still to come • Falling house Prices • Decline in manufacturing • Reducing public expenditure • Interest rates already at zero • Where is growth going to come from

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