Growth in line with potential was associated with an ever increasing debt-to-GDP ratio. What might have appeared to have been a sustainable growth path from an output gap perspective was a growth path that gave rise to unsustainable debt dynamics. In short, the application of the Taylor Rule by the US Federal Reserve would have paved the way towards excessive debt accumulation, financial instability, and the subsequent financial crisis.
Monday, September 10, 2012
Modern central banks love bubbles, as they explain in a VoxEU.org article: