This project arose from the need to provide rigorous research on the topic. The so-called “Great Contraction” in the world’s advanced economies is the most severe and synchronized global financial crisis since the Great Depression. It has forced all concerned parties to reassess the roles played by public and private debt, as well as the importance of international financial linkages.
Nations in the European Union continue to struggle with a crisis over the debts of periphery countries, most notably Greece but also Ireland, Spain, Portugal, and Italy. The failure of most advanced countries to recover—or to regain pre-crisis levels of employment and growth in its aftermath—raises fears of experiencing the equivalent of Japan’s “lost decade”. In the wake of the crisis, it is clear that the macroeconomic models previously used by central banks and others have severe limitations. In particular, these models do not adequately incorporate financial frictions and are almost always estimated over relatively narrow data sets that do not span financial crises. The recent crisis also raises many other issues, including the links among government and private sector debt, the financial sector, and the political processes governing the resolution of fiscal and financial distress.[...]