What does that imply for monetary policy? Smets and Trabandt (2012) note three consequences. First, it increases the burden of monetary policy. Large increases in deficits and debt have led fiscal policy to be tightened considerably, particularly in countries where the government has faced problems with their access to financial markets.
When we think about what the post-crisis environment might look like, it seems unlikely that we’ll be going back to the days of consistent double-digit growth in credit that we saw in the pre-crisis years.