ABSTRACT
The global economic crisis initiated by the burst of the US subprime bubble and the subsequent bankruptcy of Lehman Brothers Holdings Inc. in September 2008, the “Lehman Shock,” drastically changed the way that governments and central banks throughout the world conducted macroeconomic policies. The crisis restored the concept of Keynesian fiscal policy and the use of fiscal measures of governmental spending and taxation to stabilize output and employment in an economy by expanding or contracting its aggregate spending. Since John Maynard Keynes (1883-1946) manifested this concept in The General Theory (1936), it occupied the way politicians and policy officials thought about macroeconomic policies, at least until the 1960s (Keynes, 1978). However, subsequent criticism by certain leading economists of Keynesian macroeconomics crucially undermined the notion. It gradually decayed thereafter and was supposed to be literally useless precisely until the crisis began. The gravity of the crisis eventually forced many governments to resort to the Keynesian fiscal policy that was ignored for a long time, although stubborn opposition to the policy was rampant. The change was no less drastic for monetary policy. Until the crisis, few countries experienced reaching the lower bound of interest rates. In The General Theory (1936), Keynes referred to a situation in which injections of money into an economy by a central bank could no longer lower interest rates, later called a “liquidity trap.” Although the concept of a liquidity trap subsequently became prevalent in Keynesian literature, the actual case cited as its historical example was usually confined to that of the US in the 1930s when the short-term interest rate as measured by three-month Treasuries was lowered to 0.05 percent during the Great Depression. However, as the latest global crisis proceeded, most of the major developed countries, including the US, the UK, Japan, and the countries in the euro region, consequently had to encounter a situation in which the short-term interest rate was lowered to its minimal level. Therefore, the central banks could no longer use the conventional way of lowering policy interest rates to stimulate investment and consumption of private corporations and households. This situation compelled the central banks to initiate various measures of unconventional monetary policies, or monetary policies other than manipulating the policy interest rate.1
