Macroeconomic - Background of the Early 2000s Crisis

1. Introduction

As we all know, there are two arms of macroeconomic management-fiscal policy and monetary policy. It would be important that we understanding what and how fiscal and monetary policy can do to enhance the economic performance is a continuing challenge for economic policymaker around the world. For a good economic policymaking, it is necessary to analysis and measure how fiscal and monetary policy is affected by different macroeconomic condition and how it affects the macroeconomy. This paper aims to analysis the role of monetary and fiscal policy in macroeconomy and the origins of the financial crisis in turkey and Asia during the early 2000s, the effectiveness of monetary and fiscal policy response to the crisis.

2. Background of the early 2000s crisis

As time flash back to 2000, the world economy was experiencing a recession which was caused by most governments over fiscal stimulate with a loose monetary policy. The Early 2000s recession was felt in mostly Western countries, affecting the European Union mostly during 2000 and 2001 and the United States mostly in 2002 and 2003. Canada and Australia avoided the recession for the most part, while Russia, a nation that did not experience prosperity during the 1990s, began to recover. Japan's 1990s recession continued.

The 2000s recession has been predicted for years, as the 1990's boom, the inflation and unemployment were low, it had already ceased in East Asia during 1997 Asian financial crisis. The 1990s were also a period of recession between 1995 and 1998 inclusive. The early 2000s recession was not as bad as many predicted it would be, nor was it as bad as either of the two previous worldwide recessions (Aspromourgos ,2006).

At the early 2000s, the economy in most western countries was slow down which represented as fall in aggregate demand in order to stem this fall, the government launches a spending program to boost the aggregate demand and stimulate spending and economic activity. This is known as a fiscal stimulus. Mainly, it has two ways to providing fiscal stimulus, government can provide a tax cuts that allows people to keep more disposable income and ultimately spend more, thus the consumption increased. The other way is government spending, direct government spending in infrastructure social or welfare would increases the government spending in the above equation and help boost the GDP (Berument,2008). Nevertheless, during the early 2000s, the government has over using fiscal stimulus. The large cut in tax has led too much disposable income occurs, but the level of price did not react at same time. Thus, the people did not really spend more but saved their income. Thus, the economic entered into a worse situation. In another term, A high deflationary impact because there were huge budget surpluses at the time. Keynesian economics suggests that this would

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