The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession

Japan's "Great Recession" lasted from approximately 1992 - 2007 and finally provided the economics profession with the necessary background to understand what actually happened during the US recession of the 1930s. The discoveries made, however, are so far-reaching that a large portion of economics literature will have to be modified to accommodate another half to the macro economic spectrum of possibilities that conventional theorists have overlooked. In particular, Japan's Great Recession showed that when faced with a massive fall in asset prices, companies typically jettison the conventional goal of profit maximization and move to minimize debt in order to restore their credit ratings. This shift in corporate priority, however, has huge theoretical as well as practical implications and opens up a whole new field of study. For example, the new insight can explain fully the precise mechanism of prolonged depression and liquidity trap which conventional economics - based on corporate profit maximization - has so far failed to offer as a convincing explanation. The author developed the idea of yin and yang business cycles where the conventional world of profit maximization is the yang and the world of balance sheet recession, where companies are minimizing debt, is the yin. Once so divided, many varied theories developed in macro economics since the 1930s can be nicely categorized into a single comprehensive theory, i.e., the Holy Grail of macro economics The policy implication of this new discovery is immense in that the conventional aversion to fiscal policy in favor of monetary policy will have to be completely reversed when the economy is in the yin phase. The theoretical implications are also immense in the sense that the economics profession will no longer have to rely so much on various rigidities to explain recessions that have become the standard practice within the so-called New Keynesian economics of the last twenty years.

Table of Contents:
Acknowledgments. Preface. Chapter 1. Japan's Recession. Chapter 2. Characteristics of Balance Sheet Recessions. Chapter 3. The Great Depression was a Balance Sheet Recession. Chapter 4. Monetary, Foreign Exchange, and Fiscal Policy During a Balance Sheet Recession. Chapter 5. Yin and Yang Economic Cycles and the Holy Grail of Macroeconomics. Chapter 6. Pressure of Globalization. Chapter 7. Ongoing Bubbles and Balance Sheet Recessions. Appendix. Thoughts on Walras and Macroeconomics. Index.

About the Author :
Richard C. Koo is the Chief Economist of Nomura Research Institute, the research arm of Nomura Securities, the leading securities house in Japan. Consistently voted as one of the most reliable economists by Japanese capital and financial market participants for nearly a decade, he has also advised successive prime ministers on how best to deal with Japan's economic and banking problems. Prior to joining Nomura, he was an economist with the Federal Reserve bank of New York, and was a Doctoral Fellow of the Board of Governors of the Federal Reserve System. Author of many books and a visiting professor of Waseda University, he was awarded the Abramson Award by the National Association of Business Economics, Washington, D.C. for 2001. He is also a columnist with the businessWeek Online and the only non-Japanese member of the Defense Strategy Study Conference of the Japan Ministry.

Review :
"As I have noted before, the best analysis of what happened to Japan is by Richard Koo" (Financial Times, February 18th 2009)