Economic Themes (2011) 49 (2) 2, 153-174


Aleksandra Praščević

Abstract: This paper is dedicated to discussing important issues of monetary policy in a situation imposed by the requirement to overcome the economic recession. In this context, the paper deals with monetary policy conducted during the Great Depression in the 1930s, and monetary policy mistakes that led to the beginning and later to extending and deepening of the economic crisis. The Great Depression contributed to the success and dominance of Keynesian theory and monetary sphere related to the rejection of the quantity theory and accepting the theory of liquidity preference. The latest global economic crisis in 2008 reaffirmed the dual objectives of monetary policy - price stability and full employment. At the same time, there was a reemergence of discretion in monetary policy based on interest rates, although the very discretion monetary policy measures from the early 2000, aimed at overcoming the short and mild recession in 2001 in the US, was highlighted as a possible source of the latest crisis. Monetary expansion, although not sufficiently effective method for overcoming the recession, just as Keynesian theory argued, was necessary in a situation where the financial system should be saved from collapsing, to provide liquidity and contribute to the increase in aggregate demand. Of course, this was possible in a situation where the economies were faced with the threat of commencement of deflationary spiral. However, long term monetary expansion, accompanied by fiscal expansion and a weak recovery raises the question of the final effects of monetary policy, which may in future be marked by a rising inflation.

Keywords:  economic recession; monetary policy goals; keynesianism; Taylor`s rule

PDF file