UN Department of Economic and Social Affairs (DESA) Working Papers

The UN Department of Economic and Social Affairs (DESA) Working Papers aim to stimulate discussion and critical comment on the broad range of economic, social and environmental issues associated with the United Nations Development Agenda.


Crisis Mismanagement in the US and Europe

Impact on Developing Countries and Longer-Term Consequences

There are two major failings in policy interventions in the crisis in the US and Europe: the reluctance to remove the debt overhang through timely, orderly and comprehensive restructuring and the shift to fiscal austerity after an initial reflation. These have resulted in excessive reliance on monetary means with central banks entering uncharted policy waters, including zero-bound interest rates and the acquisition of long-term public and private bonds. This ultra-easy monetary policy has not been very effective in reducing the debt overhang and stimulating spending. It has, however, generated financial fragility, at home and abroad, particularly in the case of the US as the issuer of the key reserve currency, and exit is full of pitfalls. Although ultra-easy money is still with us, the markets have begun pricing-in the normalization of monetary policy in the US and this is the main reason for the turbulence in emerging economies. Policy response to an intensification of the stress in the South needs to depart from past practices and should include measures to involve the private creditors in crisis resolution and provision of market support and liquidity by central banks in major advanced economies.


Keywords: Debt workouts, Monetary policy, Crisis, Fiscal austerity
JEL: E50: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Monetary Policy, Central Banking, and the Supply of Money and Credit: General; F34: International Economics / International Finance / International Lending and Debt Problems; E66: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / General Outlook and Conditions; H12: Public Economics / Structure and Scope of Government / Crisis Management
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