Citation

Discussion Paper Details

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Title: The Political Economy of US Bailouts, Unconventional Monetary Policy, Credit Arrest and Inflation during the Financial Crisis

Author(s): Alex Cukierman

Publication Date: January 2015

Keyword(s): banks' reserves, credit, inflation since financial crisis, monetary policy and Political economy of US bailouts

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: This paper documents and analyzes the interactions between the financial sector, politics and macro policymaking that, following Lehman?s collapse, led to extremely expansionary monetary policy measures and large fiscal rescue packages. After discussing the political economy of major 2008 bailouts the paper documents and analyzes the consequences of those measures for the monetary base, banks reserves and total credit flows. It shows that, in spite of such exceptional measures the US economy experienced substantial and persistent reductions in credit formation through banks as well as through the bond market along with persistently anemic inflation. Drawing on financial, institutional, legal and regulatory details, as well as on modern decision theory the paper provides explanations for the impact and the longer term effects of the subprime crisis and of the associated policy responses on total credit formation and on inflation. It also briefly considers current options of monetary policymakers with respect to the choice of future exit strategies and their timing.

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Bibliographic Reference

Cukierman, A. 2015. 'The Political Economy of US Bailouts, Unconventional Monetary Policy, Credit Arrest and Inflation during the Financial Crisis'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10349