How to avoid a recession?

A recession is a fall in real GDP/ negative economic growth. To avoid a recession, the government and monetary authorities need to try and increase aggregate demand (consumer spending, investment, exports). There is no guarantee that they will work. It will depend on the policies and also the causes of the recession.

The primary policies will be

Loosening of monetary policy – cutting interest rates to reduce cost of borrowing and encourage investment

Expansionary fiscal policy – increased government spending financed by borrowing will enable an injection of investment into circular flow

Ensure financial stability – in a credit crunch, government intervention to guarantee bank deposits and major financial institutions can maintain credibility in the banking system.

If the recession is caused by very high-interest rates, then cutting interest rates may help avoid a recession. But, if you have a large fall in asset prices/bank losses (often called balance sheet recession) it is more difficult because even if you cut interest rates, banks may still not lend.