If the question is when markets will recover, a first-pass answer is never. - Paul Krugman

Here’s what the IMF did: In Asia (as opposed to Brazil, which as I said was a sort of caricature of the Asian programs) it did not tell countries to defend the values of their currencies at all cost. But it did tell them to raise interest rates, initially to very high levels, in an attempt to persuade investors to keep their money in place. Some vociferous critics of the IMF—most notably Harvard’s Jeffrey Sachs—said that this was very much the wrong thing to do. Sachs believed, in effect, that Asian countries could and should have behaved like Australia, simply letting their currencies decline until they started to look cheap to investors, and that if they had done so, the great slump would never have happened.
What the IMF said in response is that Asia is not Australia: that to let the currencies fall unchecked would have led to “hyperdevaluations,” and that the result would have been both massive financial distress (because so many businesses had debt denominated in dollars) and soaring inflation. The trouble with this rationale is, of course, that the massive financial distress happened anyway, thanks to high interest rates and the recession they helped cause. So the IMF at best avoided one vicious circle only by starting another.

So why did spatial issues remain a blind spot for the economic profession? It was not a historical accident: there was something about spatial economics that made it inherently unfriendly terrain for the kind of modeling mainstream economists know how to do. That something was, as you might well guess, the problem of in the face of increasing returns, a problem that is even more acute in than in . In development the crucial role that high assigned to increasing returns was a hypothesis crucial to that doctrine, but not necessarily crucial to understanding development in general. One could do meaningful theorizing about developing countries, albeit not in the grand tradition, without sacrificing the convenient assumptions of constant returns and perfect competition. In spatial economics, however, you really cannot get started at all without finding a way to deal with scale economies and oligopolistic firms.

Indeed, there has long been a strand of thought that says that moderate inflation may be necessary if monetary policy is to be able to fight recessions. Still, advocates of inflation have had to contend with a deep-seated sense that stable prices are always desirable, that to promote inflation is to create perverse and dangerous incentives. This belief in the importance of price stability is not based on standard economic models—on the contrary, the usual textbook theory, when applied to Japan’s unusual circumstances, points directly to inflation as the natural solution. But conventional economic theory and conventional economic wisdom are not always the same thing—a conflict that would become increasingly apparent as one country after another found itself having to make hard choices in the face of financial crisis.