This paper argues that the credit crunch is the result of a particular problem in the world financial system, that is, of the phenomenon of "liquidity illusion". At the heart of this still poorly under-stood phenomenon lies the spiral of financial innovation and its effects on systemic...

Emerging market economies often face sudden stops in capital inflows or reduced access to the international capital market, a development that can cause serious disruptions in economic activity. This paper analyzes what monetary policy can accomplish in such an event. Optimal monetary policy...