Working Paper: CEPR ID: DP10349
Authors: Alex Cukierman
Abstract: This paper documents and analyzes the interactions between the financial sector,politics and macro policymaking that, following Lehman?s collapse, led to extremelyexpansionary monetary policy measures and large fiscal rescue packages. Afterdiscussing the political economy of major 2008 bailouts the paper documents andanalyzes the consequences of those measures for the monetary base, banks reserves andtotal credit flows. It shows that, in spite of such exceptional measures the US economyexperienced substantial and persistent reductions in credit formation through banks aswell as through the bond market along with persistently anemic inflation. Drawing onfinancial, institutional, legal and regulatory details, as well as on modern decision theorythe paper provides explanations for the impact and the longer term effects of thesubprime crisis and of the associated policy responses on total credit formation and oninflation. It also briefly considers current options of monetary policymakers with respectto the choice of future exit strategies and their timing.
Keywords: political economy of US bailouts; banks reserves; credit; monetary policy; inflation
JEL Codes: E51; E52; E58; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interactions among financial institutions, policymakers, and political pressures (E44) | expansionary monetary policies (E52) |
| interactions among financial institutions, policymakers, and political pressures (E44) | large fiscal rescue packages (H12) |
| expansionary monetary policies (E52) | reductions in credit formation (E51) |
| large fiscal rescue packages (H12) | reductions in credit formation (E51) |
| lack of transparency in the repo market (E44) | credit flows (F32) |
| political economy surrounding bailouts and monetary policy decisions (E60) | sluggish recovery in banking credit (E51) |
| expanded monetary base (E50) | absence of robust inflation (E31) |