Summary of Crunch Time

Fiscal Crises and the Role of Monetary Policy

US Monetary Policy Forum,

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Crunch Time summary
High sovereign debt levels can trap nations in a vicious circle of rising rates and growing debt.


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How much government debt is too much? At what point does it cause an economy to spiral out of control? Four economists – David Greenlaw, James D. Hamilton, Peter Hooper and Frederic S. Mishkin – studied data from 20 developed nations over a 12-year period seeking to answer these difficult, dynamic questions. They explain the problem and its possible ramifications as well as the dismal science allows. Along with a math-heavy econometric analysis, the authors concisely interpret their findings for those who are statistically challenged. Though their conclusions and methodology have met with some pushback from other economists, this is an intelligent analysis of the broader situation. getAbstract recommends this report to economists, academics, financial professionals and government officials working on fiscal and monetary policy.

In this summary, you will learn

  • Why elevated sovereign debt levels portend higher interest rates, triggering more borrowing in an “adverse feedback loop”;
  • How reaching that tipping point threatens the fiscal sustainability of countries; and
  • What econometric models say are the prospects for some euro zone countries, the United States and Japan.


Remembering Days Without Debt
The current global debt crisis didn’t exist in the 1990s. At that time, the United States had a budget surplus. Even the poorer countries of Western Europe were shedding debt as a percentage of gross domestic product. This sanguine picture changed in 2008, ...
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About the Authors

David Greenlaw is chief US fixed-income economist at Morgan Stanley. James D. Hamilton is an economics professor at the University of California at San Diego. Peter Hooper is chief economist at Deutsche Bank Securities. Frederic S. Mishkin is a banking professor at Columbia University.

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