By Forrest Capie, Geoffrey E. Wood

The recession which many nations skilled within the early Nineteen Nineties had convinced strange facets. so much particularly, and customary to all nations, used to be the behaviour of asset costs relative to the final cost point. as a result, purposes have been sought to give an explanation for the certain features of the recession and as a result of behaviour of asset costs cognizance grew to become to 'Debt-Deflation Theories' linked in several varieties with Keynes and Irving Fisher. The members to this quantity talk about the importance of debt deflation. Their awesome universal characteristic is that, at the proof provided right here, the behaviour of asset costs shouldn't be of significant trouble to coverage makers, or to these trying to comprehend financial behaviour. despite the fact that, residual doubts stay over the japanese case.

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We see the regime shift of the early 1990s as an understandable reaction to, maybe even unavoidable consequence of, the preceding events. Still, the unexpectedness of the regime shift explains part of the sharpness of the consequent downturn. To recapitulate, in the late 1980s and early 1990s the Swedish economy went through a dramatic process. First, during a boom phase in the second half of the 1980s, real rates of interest were low or negative, asset prices rose rapidly, household saving rates turned negative, the gross indebtedness of the private sector rose, unemployment reached exceptionally low levels, and - given the pegged exchange rate - the tradable sector was squeezed while the non-tradable sector, in particu- Lars Jonung and Joakim Stymne 51 Jar the construction and the financial sector, expanded.

2 Ql 0> "' 0 ~ -1 EQl Ql c.. -2 -3 -4 -5 1989 1990 1991 1992:1-3 1992:4 1993:1 1993:2 1993:3 Source: Ministry of Finance. 18 Interest margins in the banking sector: spread against sixmonth treasury bills 48 Asset Markets and Economic Activity in Sweden, 1985-93 extra liquidity by the Riksbank to the institutions averted an acceleration of the financial crisis as it expressed itself through the spread between government bonds and housing bonds. No mortgage institution has defaulted on any of its bonds.

0 c: 100 0 Q; CL 80 1970 1973 1976 1979 1982 1985 Source : Ministry of Finance. 2 Total lending by credit institutions, 1970-93 1988 1991 26 Asset Markets and Economic Activity in Sweden, 1985-93 lending as a share of GDP was almost constant. It then grew from less than 80 per cent of GDP to over 130 per cent in just four years. Monetary and Fiscal Policy Environment In 1984-85, the Swedish economy was experiencing capacity constraints and other bottleneck problems. Production costs were increasing more rapidly than for the most important foreign competitors, the current account was weakening, and so was the government budget.

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