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Under a classic monetarist view the failure of such

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Unformatted text preview: ount as part of Friedman and Schwartz’s measure of the money supply. Under a classic monetarist view, the failure of such institutions should pose no threat to the aggregate economy. (Hence the proposals by some that finance can remain only lightly regulated, as long as commercial banks are strictly excluded from the riskier activities.) But the consequences of the failure of of Lehman suggest otherwise. Models of the Bank Lending Channel Models Models that postulate an essential role for banks in financing certain kinds of expenditure expenditure are better able to explain how a financial crisis could have such dire consequences quences for the real economy as we have observed. However, the kinds of financial constraints that were emphasized in many past models of this kind assumed specific institutional forms and regulatory requirements that have become less relevant to the U.S. U.S. financial system over time. Consider, Consider, for example, traditional accounts of the “bank lending channel” of the transmission of monetary policy. This argument emphasized the indispensable role of commercial banks as sources of credit for certain kinds...
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