of the japanese central government budget, or about 16. 8 trillion yen this year, is devoted to servicing the national debt. ) in economics textbooks, the idea that people will save rather than spend tax cuts because of the implied increase in future tax obligations is known as the principle of ricardian equivalence. in general, the evidence for ricardian equivalence in real economies is mixed, but it seems most likely to apply in a situation like that prevailing today in japan, in which people have been made highly aware of the potential burden of the national debt. the principle of ricardian equivalence does not apply exactly to increases in government purchases ( for example, road building ) but it may apply there approximately. if, for example, people think that government spending projects are generally wasteful and add little to national wealth or productivity, then taxpayers may view increased government spending as simply increasing the burden of the government debt that they must bear. if, as a result, they react to increases in government spending by reducing their own expenditure, the net stimulative effect of fiscal actions will be reduced. in short, to strengthen the effects of fiscal policy, it would be helpful to break the link between expansionary fiscal actions today and increases in the taxes that people expect to pay tomorrow. my thesis here is that cooperation between the monetary and fiscal authorities in japan could help solve the problems that each policymaker faces on its own. consider for example a tax cut for households and businesses that is explicitly coupled with incremental boj purchases of government debt - so that the tax cut is in effect financed by money creation. moreover, assume that the bank of japan has made a commitment, by announcing a price - level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent. under this plan, the boj's balance sheet is protected by the bond conversion program, and the government's concerns about its outstanding stock of debt are mitigated because increases in its debt are purchased by the boj rather than sold to the private sector. moreover, consumers and businesses should be willing to spend rather than save the bulk of their tax cut : they have extra cash on hand, but - because the boj purchased government debt in the amount of the tax cut - no current or future debt service burden has been created to imply increased future taxes. essentially, monetary and fiscal policies together have increased the nominal wealth of the household sector, which will increase

. these conditions caused equity prices to fall sharply, the cost of short - term credit – where available – to spike upward, and liquidity to dry up in many markets. losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. a marked increase in the demand for safe assets – a flight to quality – sent the yield on treasury bills down to a few hundredths of a percent. by further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth. the federal reserve took a number of actions to increase liquidity and stabilize markets. notably, to address dollar funding pressures worldwide, we announced a significant expansion of reciprocal currency arrangements with foreign central banks, including an approximate doubling of the existing swap lines with the european central bank and the swiss national bank and the authorization of new swap facilities with the bank of japan, the bank of england, and the bank of canada, among others. we will continue to work closely with colleagues at other central banks to address ongoing liquidity pressures. the federal reserve also announced initiatives to assist money market mutual funds facing heavy redemptions and to increase liquidity in short - term credit markets. despite the efforts of the federal reserve, the treasury, and other agencies, global financial markets remain under extraordinary stress. action by the congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. in this regard, the federal reserve supports the treasury's proposal to buy illiquid assets from financial institutions. purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. more generally, removing these assets from institutions ’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth. i will now turn to a brief update on the economic situation. ongoing developments in financial markets are directly affecting the broader economy through several channels, most notably by restricting the availability of credit. mortgage credit terms have tightened significantly and fees have risen, especially for potential borrowers who lack substantial down payments or who have blemished credit histories. mortgages that are ineligible for credit guarantees by fannie mae or freddie mac – for specifically, the loan is collateralized by all of the assets of the company and its primary non - regulated subsidiaries. these assets include