The Great Recession of 2008-2009: Causes ... - Index of - IZA

4 Mitigating the effects of the crisis and securing a sustainable recovery:
the effectiveness of policy responses
As the global financial crisis unravelled, governments across the globe increasingly
recognized the severity of the downturn and the urgency to intervene in order to avoid a
catastrophic collapse of the financial markets and real economy. The response has consisted
of three main interventions: 1) bailouts and injections of money into the financial system to
keep credit flowing; 2) cutting interest rates to stimulate borrowing and investment; and 3)
extra fiscal spending to shore up aggregate demand. These measures have sought to prevent
further economic deterioration and ultimately keep workers in jobs where possible and help
create new jobs to provide opportunities for the unemployed. Overall, this response has
helped avoid a far more severe downturn, though effectiveness has varied considerably across
countries. In this context, this section summarizes both the macroeconomic and labour market
policy responses.
4.1 Macroeconomic policies, stimulus packages and the composition of policy
interventions: an overview
Systemically important nations, especially from the developed world, have engaged in
historically unprecedented expansionary monetary policy, entailing both aggressive
reductions in policy rates and quantitative easing. This has been combined with the
assumption of contingent liabilities on behalf of the banking system (especially through
deposit guarantee schemes) and massive support – running into trillions of dollars – for
beleaguered financial institutions. At the same time, policymakers across the world held the
view that monetary and financial policies alone could not cope with the global recession of
2008-2009. A UNDP study maintains that there are now 48 countries for which there are
reliable data on fiscal stimulus packages. Collectively, the fiscal stimulus packages account
for 3.9 per cent of world GDP (as measured in 2008) and 4.8 per cent of their national GDPs.
20 out of the 48 can be classified as developing countries. 39
The UNDP study highlights the point that social protection expenditures account for a
relatively modest proportion of the announced fiscal stimulus packages – about 25 per cent of
39 See Zhang et al. (2010).
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