Discussion paper

DP10349 The Political Economy of US Bailouts, Unconventional Monetary Policy, Credit Arrest and Inflation during the Financial Crisis

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.

£6.00
Citation

Cukierman, A (2015), ‘DP10349 The Political Economy of US Bailouts, Unconventional Monetary Policy, Credit Arrest and Inflation during the Financial Crisis‘, CEPR Discussion Paper No. 10349. CEPR Press, Paris & London. https://cepr.org/publications/dp10349