The purpose of this paper is to analyze the evolution of the crisis, its causes and the corrective policy actions with the aim of drawing up from that a set of economics policy and substantive implications and conclusions.
To throw into sharp relief the causes and particular features of the financial crisis, the paper traces the combined evolution of financial innovations and globalization which underscores the eruption of the crisis. It then analyzes the recession and the ensuing policy actions. The US actions are examined in detail by analyzing the pertinent technical, macroeconomics, and political issues. Thereafter, elements of reforms are outlined, which in part draw on the work of the Bank of International Settlements. This leads into substantive and policy conclusions of great significance.
The paper elucidates the major historic changes observed in monetary policy design and execution. It also brings out the changes in the empirical size of the various fiscal policy lags as compared with the received literature. It is argued that if the policy actions succeed the empirical relevance of the modern quantity theory and new classical macroeconomics would be thrown into question. Other set of conclusions involves setting up an internationally coordinated of financial regulations and bank supervision. It is argued that reforming the international monetary system has become unavoidable. There are also a host of specific other conclusions.
The conclusions and analysis contained in this paper are totally new. Given their comprehensiveness and global orientation, they will presage in future work, an overdue revision in received macroeconomic theory and financial supervision not seen since the 1960s.
