Government policies and financial crises: mitigation, postponement or prevention?

Abstract

In the aftermath of the Great Recession, governments have implemented several policy measures to counteract the collapse of the financial sector and the downswing of the real sector. Within a framework of Minsky–Veblen cycles, where relative consumption concerns, a debt-led growth regime and financial sector confidence constitute the main causes of economic fluctuations, we use computer simulations to assess the effectiveness of such measures. We find that the considered policy measures help mitigate the impact of financial crises, though they do so at the cost of shortening the time between financial crises. This result is due to a relatively fast recovery of solvency and confidence induced by the policy measures under study which contribute to an increase in private credit and, thereby, effective demand. Our results suggest that without the strengthening of financial regulation, any policy intervention remains incomplete.

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