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Why are emerging economies excessively vulnerable to shocks to external funding? What was the role of financial flows from emerging to developed economies in setting the stage for the subprime crisis? This paper addresses these questions in a simple general equilibrium framework that emphasizes the aggregate implications of the misallocation of funds on the micro level. The analysis shows that the misallocation of funds amplifies volatility even in a closed economy. Financial integration between relatively distorted emerging economies and relatively undistorted developed economies leads to a further divergence in volatility, thereby providing a new and simple explanation for the divergent trends in output volatility up to the recent crisis. In the integrated environment, cheap funding leads to an endogenous deterioration of the financial system in developed economies. These predictions are consistent with a wide variety of microfoundations, in which distortions cause productive projects to be relatively more sensitive to aggregate shocks. The paper provides some empirical evidence for these microfoundations.

Banks & Banking Reform --- Debt Markets --- Economic Theory & Research --- Emerging market volatility --- Emerging Markets --- Financial crises --- Financial distortions --- Log supermodularity --- Macroeconomics and Economic Growth --- Markets and Market Access --- Matching --- The Great Moderation

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Today's global economy, with most developed nations experiencing very low inflation, seems a world apart from the "Great Inflation" that spanned the late 1960's to early 1980's. Yet, in this book, Brigitte Granville makes the case that monetary economists and policymakers need to keep the lessons learned during that period very much in mind, lest we return to them by making the same mistakes we made in the past. Granville details the advances in macroeconomic thinking that gave rise to the "Great Moderation"--a period of stable inflation and economic growth, which lasted from the mid-1980's through the most recent financial crisis. She makes the case that the central banks' management of monetary policy--hinging on expectations and credibility--brought about this period of stability, and traces the roots of this success back to the eighteenth-century foundations of modern monetary thought. Tackling fundamental questions such as the causes of inflation and its relation to unemployment and growth, the natural rate of inflation hypothesis, the fiscal theory of the price level, and the proper goals of central banks, the book aims above all to demonstrate the dangers of forgetting the role of credibility in establishing sound monetary policy. With the lessons of the past firmly in mind, Granville presents stimulating ideas and proposals about inflation-targeting principles, which provide tools for present-day monetary authorities dealing with the forces of globalization, mercantilism, and reserve accumulation.

Money. Monetary policy --- Inflation (finance) --- Monetary policy --- Inflation (Finance) --- 333.841 --- 333.846.2 --- AA / International- internationaal --- 332 --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Finance --- Natural rate of unemployment --- Inflatie. --- Verband tussen de geld-, bank- en kredietpolitiek en de prijzen. --- Business & Economics --- Money --- Monetary policy. --- E-books --- Inflatie --- Verband tussen de geld-, bank- en kredietpolitiek en de prijzen --- Brazil. --- Great Moderation. --- Russia. --- Sargent and Wallace. --- capacity utilization. --- central bank. --- competition. --- economic growth. --- economic theory. --- economists. --- euro. --- exchange rate. --- external rule. --- financial crisis. --- financial integration. --- financial stability. --- fiscal policy. --- global economy. --- globalization. --- income inequality. --- inflation control. --- inflation. --- international trade. --- macroeconomic policy. --- macroeconomics. --- monetary policy. --- monetary stability. --- monetary thought. --- poverty. --- price level. --- price stability. --- public debt. --- recession. --- social welfare. --- solvency. --- stable inflation. --- unemployment. --- world economy.