The United States is currently engulfed in the most severe financial crisis since the GreatDepression. The crisis was triggered by thecrash in the real estate “bubble” and amplifiedby the extreme concentration of risk in a highlyleveraged financial sector.Conventional wisdom is that both the...

Firms in emerging markets are exposed to severe financial frictions and credit constraints that are exacerbated by the sudden stop of capital inflows. Can monetary policy offset this external credit squeeze? We show that although this may be the case during moderate contractions (or in partial...