What is the role of government during recessionary times and

What is the role of government during recessionary times and
what can we learn from past recessions?
Liesel Beires
Research and Development Unit
Beiresl@kznded.gov.za
0825208753
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Introduction
The recent recessive economic climate has brought to the fore the debate around what role
governments should play in the economy. Economic history shows us that during recessive
economic conditions governments have always implemented either monetary or fiscal measures
to kick start economies. This current recession has proven to be no different with countries having
already committed $2, 75 trillion in fiscal stimulus, with the US and China being the biggest fiscal
spenders thus far. The intention of this paper is to give a brief synopsis of what fiscal and
monetary policies are and how they differ in their implementations and effects during a recession.
The paper will also address what is being done in South Africa both on the Monetary and Fiscal
Policy front. The paper will also discuss the concepts of depression economics and the ideas
presented in the theories regarding the Paradox of Thrift. Finally the paper will examine what
lessons can be learnt from previous recessions and what policies were successful during these
times.
1. The difference between Monetary and Fiscal Policy and their effects on the economy
Monetary and Fiscal Policy can be classified as the two major policy frameworks through which
the government exercises its power over economic conditions. From the foundations of
economics as a science there has been vigorous debate regarding the government’s role in the
economy. The mainstream or so called “classicalist” view point has been that government is there
to provide a safe environment in which an economy can operate. It is also there to provide public
goods, which are those goods for which there would be no incentive for private companies to
provide, such as your utilities for example. According to the “classicalist” view the government
should not get involved in the economic operations of the economy but should instead leave the
“market” to outwork itself and so apportion economic activity amongst the role players in the
economy. Another school of thought sees a more involved role for government, especially when it
comes to apportioning economic activity and prosperity across all groups in society. With the
onset of the recent global crisis there have been many that have cried that it signifies the end of
free market thinking and the end of capitalist philosophy. However, much of the same scenario
as we see today was played out during the 1930’s depression to an arguably even severer
extent. Then and now the government has always only had two tools although different at their
disposal to keep their economies under control, those of monetary and fiscal policies.
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1.1 Monetary Policy
Monetary Policy can be defined as a set of policies that a county’s central bank implements in an
attempt to influence the supply of money and interest rates and thereby influence the level of
economic activity and the amount of inflation in a country. The central premise on which Monetary
Policy is based is that there is a link between monetary variables (such as the quantity of money
and interest rates) and macroeconomic variables (such as price level, level of employment and
GDP). This link is often referred to as the Monetary Transmission Mechanism and it is used to
describe how changes in the monetary variables can effect change in the real economy. This link
is fundamental to Monetary Policy as it is through this transmission mechanism that countries’
central reserve banks can try and produce changes in the real economy. Although this
transmission mechanism is believed to exist within the economy, the ability and success of
Monetary policy to effect factors such as unemployment and output levels has been debated.
An example of how the Monetary Transmission mechanism works in South Africa can be seen in
the following example. In South Africa the SARB (South African Reserve Bank) has set itself the
goal of solely achieving price stability as its objective. This is clearly spelt out in the objectives of
the SARB’s monetary policy which states that the aim of Monetary Policy in South Africa is to
protect the buying power of the rand. The primary method which has been chosen to do so is
inflation targeting which involves setting inflation targets (3-6%) and using interest rate changes
to affect the level of spending and credit extension in the economy. This has been implemented
to achieve two main purposes:
1. To prevent money itself from being a major source of economic disturbance
2. To provide a stable background for the economy
In achieving these two purposes Dr XP Guma (Deputy Director of the SARB) believes that it
enables producers and consumers, employers and employees to proceed with full confidence
that one aspect of an otherwise unknowable future is predictable, that of the “purchasing power of
money”. If economic players have peace of mind regarding the purchasing power of their money
it allows entrepreneurs to plan and act and savers to save without fear of their investment being
eroded by inflation.
Inflation targeting has not always been the method that the SARB has chosen to achieve its goal
of price stability. This regime was implemented in 2000 and has been in existence for nine years.
The table below outlines the five “regimes” that have governed Monetary Policy in South Africa
since the 1960’s.
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Table1- Table showing the different Monetary Policy Regimes in South Africa
YEARS
REGIME
DESCRIPTION
1960-1980
Liquid- Asset Based System
Quantitative controls of interest rates & credit
1981-1985
Mixed System
Banks held certain % of their liabilities in the
form of cash reserves with the SARB. Cost of
credit was linked to the SARB discount rate.
1986-1998
Cost of Cash Reserves system with
Pre-announced targets of money supply
monetary targeting
pursued indirectly through changes in the
SARB’s bank rate.
1998-1999
Repurchase Agreement System (REPO
Repurchase system coupled with pre-
system)
announced targets of money supply & informal
targets of core inflation.
2000-2009
REPO system with formal inflation
Monetary Policy Committee meets regularly to
targeting
consider adjustments to the repo rate
Source: Mohr et al 2004
This table above highlights that there are different ways in which the Monetary Transmission
Mechanism can be implemented in the economy. The move towards using the Repo Rate
method is in keeping with the emphasis nowadays on using market-oriented policy measures to
guide financial institutions into taking certain actions. The way in which this works is that part of
the role of the SARB is to be the “lender of last resort” in the economy. The repo rate is the rate at
which the SARB grants assistance to the banking system and represents the cost of credit to the
banking system. If the repo rate is changed it automatically implies that interest rates charged by
banks on deposits and lending also change. It is through this process that the changes in interest
rates reach the real economy. The diagram below captures the Monetary Transmission
Mechanism quite effectively and shows how ultimately changes in the Repo rate affects
aggregate demand in the economy, which in turn should keep inflation in check.
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Diagram1- The Monetary Transmission Mechanism
Source: M Sichei 2005- University of Pretoria
The idea of the SARB only having one policy objective of inflation targeting rather than mixed
objectives is not unique to South Africa. In recent years both politicians and economists have
advocated that the stabilization of inflation be left to Monetary Policy. This is why many central
banks around the world have chosen to focus only on achieving price stability in an economy.
The rationale behind this is that it is believed that Monetary Policy that is aimed at price stability
will take into account the state of cycles in the economy. This implies that when the economy is
booming or on an upswing then inflation is likely to be slightly higher and therefore interest rates
will be proactively raised in order to prevent inflation from drastically increasing due to an
overheated economy. Likewise on the other side of the cycle if economic growth is slowing and
recessive times are prevailing then inflation should theoretically be declining, which would give
central banks room to reduce interest rates in an attempt to stimulate investment and economic
activity.
However to the critical eye, one would already see that presently in South Africa, this has proven
not to be the case. We have seen our economy go into a period of slow growth; however it
appears that inflation is proving to be stubborn in its rate of decline. This can be the result of two
factors. The first one is that in economics one has the phenomenon of “sticky prices” which says
that prices are quick to increase, but slow to decrease, which is proving to be the case. The
second factor is that inflation can remain high in an economy despite a slow down in economic
activity due to a supply shock occurring. An example of a supply shock would be the two things
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that we have and are about to experience shortly in the South African economy. The first one
would be an increase in oil prices and the second one being a drastic increase in energy prices.
When a supply shock occurs it results in prices and output moving in opposite directions. In this
instance the objective of solely achieving price stability becomes difficult for Monetary Policy.
Brash (1993) indicates that in this circumstance Monetary Policy should in principle
accommodate at least part of the adjustment, as to do otherwise would mean taking all the
adjustment of the supply shock in the form of lost output. He states that in this case there is merit
to allow inflation to lie slightly outside the inflation target band.
The question remains, if the South African SARB would take a view such as this in this kind of
circumstance? Judging on past behaviour, one has seen that the SARB has been very focused
on keeping inflation in the 3-6% band. We have already seen a halting in the decreasing of
interest rates as inflation is proving to be stubborn in its descent. With the imminent 34% increase
in Eskom tariffs this is only likely to exacerbate this problem. However this could theoretically be
viewed as a supply shock and therefore be accommodated for by the SARB. Dr XP Guma
(Deputy Director of the SARB) asked the question in May 2009 of whether achieving price
stability was enough. His answer was “Yes, in ordinary times, but No, in extraordinary times”. He
went on to say that slave like adherence to an invariant policy stance is unlikely to yield optimal
outcomes when circumstances change dramatically, as they have in recent times. Although this
statement has been made, one could still question if the SARB has in fact adhered too much to
inflation targeting, especially during these recessionary times?
The debate around adherence to inflation targeting is not a new one, with recent statements
made by Cosatu indicating that there is room for the SARB to introduce more interest rate cuts
and revisit their policy of inflation targeting. In an article by political economist Mohau Pheko
(2008) she states that we need to eradicate the myth that the goal of inflation targeting should be
the end-all of monetary policy. This is especially the case if the focus on fighting inflation excludes
other key development goals such as job creation and poverty eradication. She cites a study
done by World Bank Economists Bruno & Easterly (1996) who conclude that there is growing
evidence that moderate rates of inflation have no predictable negative consequences on the real
economy. They also show that moderate inflation is not associated with slower growth, reduced
investment or any other important real variables.
In their study they liken the relationship between growth and inflation to a bickering couple, as
these two variables cannot decide what their relationship should be. Their empirical study shows
that in the short run there does appear to be a positive relationship between inflation and growth.
Case studies from Latin America and Brazil show that countries were able to achieve high growth
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rates and have double digit inflation rates. They found that this positive relationship between
inflation and growth remained in tact for inflation rates between 15-30%, if inflation surpassed
these figures, the relationship turned negative. They indicate that inflation rates between 15-30%
can be classed as moderate inflation rates and are ones that can be sustained for long periods
without causing a growth catastrophe. They also found that supply shocks are the predominant
factor in high inflation crises and that these episodes of high inflation (defined as inflation rates of
over 40% for a period of 2 years or more) are discrete events rather than the norm.
The study done by Bruno & Easterly (1996) has significant findings and does lead one to question
the significant importance that has been placed on inflation targeting in recent years. Even if one
chooses to target inflation one can question if a 3-6% inflation target band is too prudent and if
there is in fact scope to adopt a slightly higher band. Pheko (2008) asks why does it have to be 36% and why can’t it be 8-15%? From the Bruno & Easterly (1996) study this band could even be
higher.
Joseph Stiglitz former head of the World Bank has become synonymous with the fight against
inflation targeting and has on many occasions called for its abandonment. In one of his papers,
Stiglitz makes a case that in developing countries an inflation rate of 10% and over is often
necessary to stimulate demand and economic growth. In one of his recent talks in South Africa,
Stiglitz actually laid some of the blame of the current financial crisis at the feet of central banks
that have been focusing excessively on inflation. He also dismissed the notion outright that
inflation targeting is necessary for strong and stable growth. Like Bruno & Easterly’s (1996) study
Stiglitz indicates that inflation in developing countries is largely as a result of supply shocks, such
as increases in oil and food prices. Stiglitz argues that in these cases if one uses interest rates to
try and reduce aggregate demand and in this way tame price increases in goods and services;
one will have to take interest rates to intolerable levels to bring inflation down to targeted levels.
In this circumstance inflation targeting has little effect on keeping inflation in check. This is why
Stiglitz has called for the abandonment of inflation targeting especially in developing countries.
Stiglitz states that many countries have already moved towards a more flexible inflation targeting
system and that containing inflation has to be balanced with other concerns such as sustaining
growth. It appears that South Africa has not had this shift in mindset yet. Perhaps there is a
tendency to have a slave like adherence to inflation targeting in this country rather than seeking
to implement Monetary Policy that has an element of accommodation for the current downturn
that the country is facing.
The other side to this argument is that during recessionary times when investor confidence and
expectations are at an all time low, Monetary Policy may actually have very little effect on the
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economy. This is especially the case when a recession has been brought about by a crisis in
financial institutions. This is because when credit markets cease to operate efficiently the
channels (or monetary transmission mechanism) through which conventional Monetary Policy
operates ceases to be effective. This phenomenon was labeled a “liquidity trap” by the famous
economist John Maynard Keynes. A liquidity trap results when people are scared of debt and will
not borrow even if the cost of money falls virtually zero. This results in Monetary Policy becoming
ineffective as consumers would rather hold onto their money rather than invest or borrow. This
has further consequences for the “Paradox of Thrift” which will be discussed later on in the paper.
It is because of this that some have argued that Monetary Policy is very effective in slowing down
an overheated economy but it is not so effective in stimulating a lagging economy. This would
especially be the case if the lag has been caused by a financial crisis.
Although there may be merit to this argument one needs to bring into the equation the issue of
sentiment and expectations. Economic behaviour is largely driven by prevailing sentiment or
“animal spirits” as it has often been termed. These prevailing sentiments often turn into self
fulfilling prophecies, as if people are expecting an economic downturn, they stop spending which
reduces aggregate demand which in turn causes an economic downturn. In this regard Monetary
Policy could have an important role to play as a signaling mechanism in the economy. Having
lower interest rates or an environment where interest rates are being reduced does have an
impact on improving general sentiment in the economy. Although there may be a lag in the time it
takes for people to start investing and borrowing again, it is acting as a signal that the cost of
capital and investing is decreasing. This will act as a signal that the economic climate may be
more favourable to start spending money in again. Besides acting as a positive signal a decrease
in interest rates also has an impact on those that already have debt as it decreases the cost of
this debt for them and results in them having a bit more disposable income in hand to start
spending in the economy. One can therefore not rule out Monetary Policy as a tool to be used
effectively during recessionary times.
1.2 Fiscal Policy
Fiscal Policy refers to the ability of government to spend directly in the economy in an attempt to
stimulate aggregate demand in the economy. There are three main types of tools available to
government under Fiscal Policy, these are:
1. Changing/cutting tax rates
2. Changing/increasing government spending
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3. Automatic Fiscal Policy adjustments such as unemployment insurance
During recessionary times, Fiscal Policy is often preferred as a stimulatory tool as it can be used
to directly target the areas/groups in the economy that need the stimulation the most. Examples
of such measures could be increases in means tested benefits for low income households;
reductions in the rate of corporation tax for small medium enterprises or investment allowances
for businesses in certain regions. Fiscal Policy has also proven to be more effective than
Monetary Policy during recessions that have been caused by financial crises. This is due to the
liquidity trap scenario that was discussed earlier where Monetary Policy can prove to be
ineffective due to people’s lack of willingness to borrow. In this instance direct investment into the
economy through government spending has a greater positive impact on aggregate demand.
An IMF (2009) study showed that recessions that are associated with financial crises are typically
severe and long lasting. They found that during these times Fiscal Policy is needed to try and
help speed up the recovery period. Their study showed that over the past 50 years there have
been 122 recessions globally, with the 15 recessions that were associated with financial crises
being the longest and most costly. This is because during recessions that occur after financial
fallouts households usually drastically change their savings behaviour in an attempt to restore
their balance sheets. This in turn leads to a sharp decline in consumption. This is why policy
makers argue for the need for Fiscal Policy to be implemented to prevent a severe decline in
aggregate demand and the subsequent consequences from this such as unemployment and
reduced output.
There has however been much debate regarding the usefulness of Fiscal Policy, with the
classical/free market thinkers not being a proponent thereof. This is because they largely base
their arguments on the concept of “crowding out”. This idea is based on the premise that
individuals’ change their own behaviour when government starts spending more in an economy.
Therefore instead of increasing spending in an economy it merely changes the composition of
spending to more public spending rather than private. This is based on the belief that people have
rational expectations and when they see that government is spending more they factor in future
tax increases and therefore increase their current savings in anticipation hereof. During the
current recession it appears that governments have chosen to implement Fiscal Policy through
embarking on some of the largest fiscal stimuli programmes yet as was seen in the opening
introduction of this paper. The buy-in into the fiscal stimuli ideology has been neatly summed up
in Barack Obama’s quote of: “We have to spend our way out of this recession”.
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2. South Africa’s Fiscal Response
The South African government has released a document in February 2009 entitled “Framework
for response to the International Economic Crisis”, which was drawn up by organized labour,
business and government. This is the document that is to frame government’s response to the
economic crisis South Africa is facing. Like many other governments across the globe, the South
African government has recognized the need to embark on government spending and assistance
of industries in the economy. The framework of response indicates that the focus of government
and business will be divided between 5 measures. These being:
1. Investment in Public Infrastructure
2. Macro Economic Policy Measures
3. Industrial and Trade Policy Measures
4. Employment Measures
5. Social Measures
In regards to government direct spending the framework indicates that investment in Public
Infrastructure is one of the key means of responding to the downturn in the economy. The
framework commits to maintaining high levels of investment in public infrastructure to encourage
private sector investment. The R787 billion public investment programme which is to be
embarked on by government will remain in place and will run until 2012. The focuses of this
public infrastructure spend will be on the following:
-
Expanding and improving the road and rail networks
-
Public transport
-
Port operations
-
Dams, water and sanitation infrastructure
-
Low income housing construction
-
ICT infrastructure
-
Education and health infrastructure
The framework indicates that where possible the maintenance of existing infrastructure and the
building of new will be done using labour intensive approaches where possible.
The South African government has highlighted that there are two major underlying tenets to the
framework of response which need to be born in mind when dealing with the current crisis. The
first one is that this economic crisis has the potential to do the most harm to the most vulnerable
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group in society- these being the low income workers, the unemployed and the poor. In doing so
it can further add to the problems of poverty and inequality that we as a nation are faced with.
The framework highlights that it is South Africa’s collective responsibility to ensure that the most
vulnerable in society are protected as far as possible from the impacts of the economic crisis. The
second tenet that comes through very strongly in the document is the focus on creating decent
work. The framework points out that during this period of downturn it does provide the economy
with the opportunity to prepare itself to take advantage of the next upturn. One of the areas in
which change can be affected is in creating decent work opportunities; this implies that we do not
only have to increase the level of employment but also the quality. The concept of decent work is
one which the current government is very committed to, despite the reservations that many have
regarding its impact on the rapidity of job creation.
3. Learning from Past Recessions
The question that needs to be asked is, if this Fiscal expansion that is taking place around the
globe is the right way to fight the current recession? If one turns to history for directives for
current behaviour one learns the following. Wilkinson (2009) indicates that one of the crucial
understandings that can be learnt from the Great Depression in the 1930’s is that stimulus
spending does help an ailing economy. A paper produced by Romer (2009) presents six key
lessons that can be learnt from the Great Depression that would be useful for the global situation
at present. It is interesting to note that the origins of the Great Depression and the current
recession are very similar. Like during the Great Depression, today’s downturn had its
fundamental decline in asset prices and the failure and near-failure of financial institutions. In
1929 like today the collapse and extreme volatility of stock prices led consumers and firms to
simply stop spending.
The first lesson that Romer (2009) draws from the Great Depression is that during the 1930’s
small fiscal expansion had only small effects. She therefore suggests that during the 1930’s
Fiscal Policy failed to generate a recovery, not because it doesn’t work but because it was not
tried at a large enough scale. Romer, emphasizes in her paper the need for embarking on Fiscal
Policy on a scale that is large enough to deal with the recession that it is trying to curb.
The second lesson that is brought out from the 1930’s is that monetary expansion can help to
heal an economy even when interest rates are near zero. She therefore supports the argument
presented earlier in the paper that Monetary Policy does have an important role to play by merely
affecting people’s expectations. During the Great Depression lower real interest rates played an
important part as they resulted in real fixed investment and spending on durables to increase
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dramatically during 1933 & 1934 when all other consumer spending barely budged. This shows
that lower interest rates can encourage investment spending even during recessionary times.
The third lesson that is highlighted in the paper is a warning of cutting back stimulus too soon.
Romer (2009) indicates that this is what happened during the 1930’s when in 1937 the US
government started to implement contractionary Monetary and Fiscal Policy. As a result of this in
1937, GDP (Gross Domestic Product) only rose by 5% compared to 13% in 1936. It then fell by
3% in 1938 causing unemployment to increase again to 19% in 1938. It is argued that this wrong
turn of starting contractionary Monetary and Fiscal Policy too soon added two years onto the
economy. Romer (2009) states that it is crucial to monitor the economy closely and be sure that
the private sector is back in the saddle before government takes away the crucial lifelines.
The fourth and fifth lessons are that during the 1930’s it was seen that financial recovery and real
recovery go hand in hand. Therefore during this recession real recovery is only going to occur
once one has had recovery taking place in the financial sectors. During the 1930’s it was also
seen that worldwide expansionary policies share the burdens and benefits of recovery. Romer
(2009) advises that the more that countries throughout the world can move towards Monetary and
Fiscal expansion, the better off the global economy will be. It takes a global response to deal with
a global crisis. The final lesson that Romer (2009) brings out in her paper is that the key feature
of the Great Depression is that it did eventually end and therefore if we embark on the right policy
measures now, we will be able to speed up the recovery period of the current global recession.
Nobel Prize winner for Economics, Paul Krugman adds further support to the findings of Romer
2009 by his concept of Depression Economics. Krugman termed the phrase of “Depression
Economics” to indicate a time period when the usual rules of economic policy no longer apply. He
indicates that when Depression Economics prevails virtue becomes vice, caution is risky and
prudence is folly. He too cites the example of 1937 when he states that the virtue of fiscal
responsibility and concern for budget deficits became a vice and the US’s premature attempt to
balance the budget almost destroyed the recovery from the 1930’s depression. Krugman states
that during normal times to have cautious policy is prudent. However in recessionary times
caution becomes risky because big changes for the worse are happening and any delay in acting
raises the chance of a deeper economic disaster. Krugman emphasizes that during recessions,
time is of the essence. He is also is a proponent of erring on the side of doing too much during
recessionary times rather than doing too little. Too some economists Krugman’s idea of
Depression Economics would be anathema, especially to free market economists who would
state that if governments wish to see a recession end as quickly as possible then the first and
dearest injunction is not to interfere with the markets adjustment process. They would argue that
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the more governments intervene the more they delay the market adjustment process and the
larger and more grueling the recession will become.
The moral, social and practicality implications of such free market thinking are vast. As was
mentioned earlier, South Africa is already facing a society in which the disparities between the
rich and poor are great, we are already facing a situation where unemployment is at unacceptable
levels and we are already facing a situation where violence and riots are breaking out due to poor
service delivery. If we were now to add the recessionary pressures to this environment and
choose not to embark on Fiscal and Monetary Policy stimuli, where would it leave us? Therefore
perhaps there are more dangers on the erring on the side of doing too little, rather than doing too
much?
4. The Paradox of Thrift
“The Paradox of Thrift” was another term coined by John Maynard Keynes in relation to the
negative multiplier effect that takes place during a recession due to reduced spending. The main
tenet of this theory is that during recessionary periods individuals cut back consumption which
results in second and third round effects which deepen the recession. One of the first reactions of
consumers during a recession is that they spend less and save more. The result of this is
illustrated in this following example. If consumers don’t spend that means retailers and
wholesalers don’t make sales, if retailers and wholesalers don’t sell, this means manufacturers
have no need to manufacture which also means that they don’t have work for employees,
resulting in job loss and so the circularity continues. This abrupt decrease in spending and
increase in saving is what is the “paradox of thrift” as thrift is normally something that is held in
high esteem in the economy but in this instance it is actually something that can deepen a
recession. A recession is caused by a drop in aggregate demand. Therefore proponents of the
paradox of thrift theory would argue that if consumers want to improve their economic situation,
they should continue to spend during a recession to help get the economy back on its feet. They
should then start to increase savings once the economy is up and running again.
However this is easier said than done as theory has it that consumers base their spending
patterns on rational expectations regarding their anticipated lifetime income. This is precisely
what happened during the last decade in the United States. Property prices soared and
individuals changed their perception of resource availability over the course of their lifespan.
Consumers got into the frame of mind of expecting constantly growing resources in terms of
asset price and they therefore spent more money. When asset prices suddenly fell the individual
consumer was caught flat footed and forced to reduce consumption and increase savings.
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The idea of consumption being based on rational expectations of lifetime income has important
consequences as it can lead to a situation that is know as a fiscal policy trap. This is a situation
where regardless of money that is poured into the economy spending will not go up despite taxes
being decreased. Consumers will only choose to increase spending when they conclude that
future income warrants an increase in spending. This is where the Paradox of Thrift causes a
recession to become self-reinforcing as it is no use in giving consumers greater disposable
income when economic rationale is telling them to save it rather than spend it. The Paradox of
Thrift once again highlights the enormous importance that expectations have in an economy and
that consumers will only spend when they feel safe to do so. As was said by Krugman during a
situation where Depression Economics prevails the rules of prudence and virtue change and
therefore Obama’s word of “We must spend our way out of the recession” may hold an element of
truth for governments and individual consumers. The whole is always a sum of its parts and
therefore aggregate demand in the economy is only going to start increasing when consumers
and government come to the party.
Conclusion
In this paper we have seen that recessionary conditions prevail when there is a reduction in
aggregate demand in the economy. We have seen that governments have two main tools at their
disposal to influence behaviour during recessions, those of Monetary and Fiscal Policy. Lessons
from past recessions have shown us that faster recovery periods are achieved if both of these are
implemented to try and achieve growth in aggregate demand. In this regard the paper has
questioned if in the South African situation we are doing enough on the Monetary Policy side of
things and if our strict adherence to our inflation targeting bands is providing a hindrance to a
faster recovery period? We have also raised the issue of whether being over cautious or prudent
both on the government side and individual consumer side can lead to a recession becoming selfreinforcing. It is true that during a recession time is of the essence and it is government that can
play a large role in providing stimulus to a failing economy. Government can also provide the right
signals that will influence expectations of individuals which in turn can promote confident
spending in the economy. May the South African government not forget that they have a vital role
to play in helping our economy out of this present recession.
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