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

Alex Cukierman

No 10349, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Monetary policy; Inflation since financial crisis; Political economy of us bailouts; Banks' reserves; Credit (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 G1 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-mac
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