Economic Recessions and Recoveries

Abstract

Economic output may drop for reasons related with supply, such as a fall in the number of the employed factors of production or increases in real costs; and for reasons related with demand, such as an increase in non-productive market power or a fall in aggregate demand, the worst type of recession in the past. Falls in aggregate demand happen when there are economic disruptions such as a savings-investment deficit or a trade-foreign investment deficit and they can be persistent when households, companies and banks’ solvency and liquidity ratios deteriorate. Due to economic rigidities, like the nominal value of paper money, the system needs to avoid a fall in monetary inflows to aggregate supply. Price stability policies cannot guarantee this aim when inflation rises. In contrast, full inflation-indexed economies can avoid or mitigate falls in aggregate demand and they can help governments to overcome recessions and to achieve a sustained growth.