The Holy Grail of Macro Economics: Lessons From Japan's Great Recession

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The Holy Grail of Macro Economics: Lessons From Japan's Great Recession

By Richard C. Koo
Wiley, 2008
300 pp. $34.95

Koo believes that Japan's "great recession" of 1991-2005 contains useful lessons for interpreting and dealing with the subprime mortgage crisis in the United States and with the burst financial bubbles in China and Europe. His book reviews the key characteristics and policy developments of Japan during this troubled period, arguing that Japan suffered from a balance-sheet recession, during which firms struggle to repair their impaired balance sheets and are therefore reluctant to take on new business, even promising business, if that will delay improvement. Under these circumstances, economies respond very differently to new shocks, new opportunities, and new policies from how they would in normal recessions. In particular, monetary policy is much less effective, since demand for new loans is weak. Fiscal action, even including the injection of new capital into banks, is necessary to avoid prolonged Japanese-style stagnation. Not all readers will agree with all its analysis and conclusions, but this book is stimulating and thought provoking.

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