MACRO-ECONOMIC ANALYSIS OF GLOBAL ECONOMIC RECESSION 2007- 2009 AND POLICY MEASURES THAT ENABLED RECOVERY OF US ECONOMY

The aim of this research paper is to attempt to understand the ‘Trilema' which has confounded the economists on how to handle the three parameters like output, interest rates and currency effectively, to achieve the optimum level for a given economy, and even to drive an economy from recession to recovery. The authors used the US economic recession (2007-2009) event as a starting point and looked at policy interventions, both fiscal and monetary. They envisaged as to how the three chosen parameters played out over time, and what economic models can explain the basis of both the policy intervention and recovery. Our exploratory work is to understand the economic policy parameters that are critical to manage; yet which has been complicated by the US's most open economy, to which the basic ISLM models could not support. The team finally found that the Mundell- Fleming model does make sense for open economy like US. The researchers analysed the data from US economy to see if the model is able to justify the data coming out from US from 2006-2016, when many policy interventions were taking place. The team focussed on the causes of this recession; because it was important to understand the variables underneath which caused the crisis in the first place. Another factor explored was the causes of the crisis, which to illustrate how money market was stretched by excess credit creation and excessive risk taking by the commercial banks in the post repeal of Glass– Steagall's Act in 1999. It also led to the phenomenal growth in the derivatives market and rapid integration of global capital markets across the world. This research paper also goes back to the fundamental question, as to if the monetary policy is more effective or fiscal policy is more effective? Or both need to be played in recovery. Was there even a role of fiscal policy and in what form was it deployed in US economic recovery? Finally the authors confirm that forex market equilibrium co-exist together with goods and money market equilibrium for open economies as that of US. It believed that currency markets are very important and important policy decisions should look at the long term impact on the currency stability; in the lens of competiveness of economy in the global market place.