Responding to the 2008 financial crisis


Research into the nature of debt has increased the understanding of the 2008 financial crisis and informed governments’ ‘quantitative easing’ policies.

What was the problem? 

Professor John Hardman Moore has worked on the role of trust in debt since 1993. Much of his work has been done with Professor Nobuhiro Kiyotaki, now of Princeton University.

Moore and Kiyotaki’s first influential paper was called ‘Credit Cycles’. This noted that borrowers cannot be forced to repay debts. As a result, impatient borrowers must provide collateral – for example, real estate – to be trusted.

This vital role of collateral alters the entire economy. A small shock changing the prices of collateral can, in turn, have a wider effect on the market and the economy as a whole.

What did we do? 

Moore gave a Clarendon Lecture at Oxford University in 2001. This built on further work with Kiyotaki in another important paper called ‘Liquidity, Business Cycles, and Monetary Policy’. This paper again focused on trust. This time both  the economists examined how money itself can be used as an asset between agents who do not trust each other to repay their debts.

This research shows that government policy can stimulate the economy. By making more money available, a government can create trade in a stalled economy. This can be done by providing state money in exchange for private assets when those private assets are not being traded. Although low trust levels occur in a bad economy, extra money provides an asset which does not depend on trust.

This research was seen as unconventional when it was produced. But in 2008, financial markets crashed around the world. This brought the research to international attention, as governments tried to solve the problem of the financial crisis.

The Federal Reserve Bank of Chicago
Moore's papers, ‘Credit Cycles’ (...) and ‘Liquidity, Business Cycles and Monetary Policy’ (...) are both seminal pieces of work which have influenced the thinking of the Bank of England and other central banks.
An executive director of the Bank of England
What happened next? 

Moore and Kiyotaki’s ideas about asset prices were again proven by the banking collapse in 2008. As a result, many policymakers turned to Moore’s work for solutions.

Moore and Kiyotaki’s work influenced  central banks to use “quantitative easing”. This policy involves injecting money into the economy to keep businesses trading when liquidity and trust are very low. The Bank of England “printed” over £375 billion in quantitative easing, and the US Federal Reserve over US$1.5 trillion.

The impact of the research has been acknowledged by an Executive Director of the Bank of England and by Charles Evans, President of the Federal Reserve Bank of Chicago.

This model has also been praised by influential economists. Nobel Laureate Paul Krugman, in an article which was critical of most economic responses to the crisis, noted that Moore-Kiyotaki is an exception which does engage with the deeper problems behind the collapse. The influential Berkley economist David Romer noted at a conference organised by the International Monetary Fund (IMF) that the model has provided insight into the reasons underlying the crisis and influenced the reactions to it.

About the researcher(s)

Professor of Political Economy

Research unit

Subject area:
  • Economics


  • The Leverhulme Trust
  • Economic and Social Research Council
  • European Research Council

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