Balance Sheet Recession and Debt Financing

This paper addresses some macroeconomic aspects of the debt crisis and debt financing. The paper concludes that, in a recession, it is not possible for all economic agents to deleverage at the same time. For that reason, in order to break out of balance sheet recession, developed countries hit by the crisis should retain low interest rates while adopting fiscal policies which, allowing for national differences, should be overall expansive. An economic policy focussing on general fiscal austerity and a strong reduction in public debt should only follow a strong upswing in activity. In our analysis of the fiscal multiplier, we explain that the value of the multiplier is far higher in a liquidity trap and in a global crisis than in a cyclical upturn and that, surprisingly, the multiplier increases in line with the average tax rate. With regard to debates on economic policy in Hungary, the paper is primarily concerned with debt financing, in particular, with a comparison of central bank financing and international borrowing. The analysis concludes that, if the international facility is used to refinance debt denominated in the national currency, then an IMF loan is not cheaper and is not of a smaller inflation risk than central bank financing, and essentially has nothing to offer that the central bank’s quantitative easing could not achieve.