Missed Opportunities

Abstract

AbstractThe two decades preceding the Global Financial Crisis are known as the “Great Moderation.” Over its course, most advanced countries made progress on debt consolidation. Debt ratios came down, mainly as a result of concerted efforts to run budget surpluses. In Europe, qualifying for the single currency added extra incentive, since membership in Europe’s monetary union required a country to keep its deficit low and to reduce its debt. An exception to the trend was Japan, where a real estate bubble and unfavorable demographics resulted in stagnation and the largest-ever peacetime increase in public debt. Fiscal prudence then receded in the 2000s, when debt started piling up again. In hindsight, this pro-cyclicality was ill-advised. When the subprime crisis hit, governments lacked fiscal space.