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May/June 2012

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Posted 2012-05-01

Milton Friedman, the Demand for Money, and the ECB’s Monetary Policy Strategy

by Stephen G. Hall, P.A.V.B. Swamy, and George S. Tavlas

The European Central Bank (ECB) assigns greater weight to the role of money in its monetary policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early 2000s, some commentators have reported that the ECB has “downgraded” the role of money demand functions in its strategy. 

Posted 2012-05-01

Liquidity Shocks, Real Interest Rates, and Global Imbalances

by David Andolfatto

The author uses a simple neoclassical model to show how liquidity shocks at home and abroad can contribute to trade imbalances and low real interest rates. The author’s interpretation is consistent with Bernanke’s (2005) “global saving glut” hypothesis.

Posted 2012-05-01

An Application of Conventional Sovereign Debt Sustainability Analysis to the Current Debt Crises

by Silvio Contessi

The developing international debt crisis has unleashed unanticipated fears that more governments in some advanced economies may default on their sovereign debt and trigger a global financial tsunami. This article provides a primer on sovereign debt sustainability and interprets the recent experience of advanced economies in the light of a uniform approach that allows an answer to this question: What are the main factors that contribute to making a country’s debt sustainable or unsustainable?

Posted 2012-05-01

Federal Reserve Lending to Troubled Banks During the Financial Crisis, 2007-2010

by R. Alton Gilbert, Kevin L. Kliesen, Andrew P. Meyer, and David C. Wheelock

Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis. This article addresses two questions motivated by such commentary: Did the Federal Reserve violate either the letter or spirit of the law by lending to undercapitalized banks? Did Federal Reserve credit constitute a large fraction of the deposit liabilities of failed banks during their last year before failure?