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The solution is to boost aggregate demand.
The BIS seems to acknowledge that central banks remain able to boost aggregate demand.
It would boost aggregate demand after private investment faded as the unsustainable housing and credit bubbles finally burst.
They add that the fund was "one of the early advocates of supportive monetary policies, including quantitative easing, to boost aggregate demand in the euro area".
He says policies have to boost aggregate demand which much be in line with ongoing changes which will not return to previous spending habits.
These changes in asset prices – together with measures that increase private-sector credit growth – can boost aggregate demand and increase inflation expectations.
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But inflation would result only if monetisation boosted aggregate demand enough to exceed aggregate supply.
Increasing social transfers during the post-crisis period would have boosted aggregate demand and smoothed out consumption patterns.
From that model, Keynes arrived at his famous conclusion that government spending can reduce unemployment by boosting aggregate demand.
"Students learn in Economics 101 that lower taxes and/or higher levels of government spending can mitigate recessions by boosting aggregate demand," he writes.
What was needed was a Keynesian policy of boosting aggregate demand via monetary easing and fiscal spending at the European level.
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