August 24, 2009
Abstract: As clear signs appear that the worst of the global financial crisis is over, the focus has moved from concerns regarding crisis to reinforcing the recovery. With high fiscal deficit and excessive liquidity in the system — a consequence of successful attempts by governments and central banks to fight the crisis — what should now be the role of governments and central banks?
Recognizing that accelerated private spending would be the key growth driver in the recovery phase, three important policy questions are discussed. One, whether the recovery can continue unaided as governments begin to retract? Two, during the recovery so far, what strategy has been more effective: fiscal versus monetary? Three, how can a double-dip or W-shaped recovery be avoided? To reinforce and sustain recovery, both fiscal consolidation (by governments) and liquidity control (by central banks) need to be pursued in a cautious and synchronised way.
Keywords: recovery; fiscal stimulus; monetary policy; double-dip recovery; inflationary pressures
