Should taxpayers bail out the banking system? One of the world’s leading international macroeconomists contrasts the Larry Summers “don’t-scare-off-the-investors” pro-bailout view with the Willem Buiter “they-ran-into-a wall-with-eyes-wide-open” anti-bailout view. He concludes that either way, taxpayers are always the losers. The best policy makers can do is to be merciless with shareholders and gentle with bank customers.

The ECB and the Fed are pursuing very different policies on inflation fighting and the use of monetary aggregates in guiding policy. One of Italy’s leading economists argues that either the ECB or the Fed is making a mistake.

Editor's Note: Originally posted 2 June 2008.
There has been a persistent spread between the rate at which banks lend each other money and government-backed securities yields in recent months. This column describes hypotheses explaining the spread – including the possibility that banks aren’t lending in order to bankrupt acquisition targets.

Low inventory levels might seem to belie the theory that soaring commodity prices are attributable to low interest rates. In this column, Jeffrey Frankel defends his argument, pointing to production decisions and cross-country comparisons.

The financial crisis has put the US Federal Reserve’s performance under the spotlight. As the United States reassesses its financial regulatory system, this column makes the case for central bank independence.

This column, first posted 17 May 2008, reviews Willem Buiter's analysis of why the ECB is so hesitant to buy debt. Central banks can go broke – and some in developing countries have done so recently. The ECB is now lending against dubious collateral. An ECB recapitalisation seems unthinkable at the moment, but that’s why it is a good time to think the unthinkable. Willem Buiter considers the question at length in CEPR Policy Insight No. 24 and argues that Eurozone fiscal authorities should, ASAP, agree on a formula for fiscal burden-sharing should an ECB recapitalisation ever be necessary.

The nature of the ongoing financial turmoil that began in August 2007 has rendered traditional monetary policy responses ineffective. This column summarises the US Federal Reserve’s response to the crisis.

The US Federal Reserve makes monetary policy based on necessarily imperfect economic forecasts. Recent research shows that the Fed is quite adept at assessing current economic conditions, but forecasting the future remains disappointingly difficult.

Central banks have experimented with ‘forward guidance’ – sending signals about the future path of interest rate policy more than just one decision ahead – as a way of stabilizing medium-to-longer run expectations. Here is a discussion of the phenomenon and some ideas on how the Fed could improve its signalling.

The new strategy is not ‘stealth inflation targeting,’ but it matters for the Fed’s own deliberations. Here the world’s leading monetary theorist argues that forcing FOMC members to look years ahead will move policy towards a coherent strategy, away from a sequence of short-term decisions -- highly desirable since the anticipation of policy matters to its effectiveness.