or - a - dud - business - class. html. some doubts about the monetary stimulus on the economy are mentioned in frederic s. mishkin “ monetary policy strategy : lessons from the crisis ”, nber working paper no. 16755, february 2011. see ben s. bernanke, “ statement before the committee on financial services ”, u. s. house of representatives, july 13, 2011. this argument is fully described in robert j. barro, http : / / www. economist. com / blogs / freeexchange / 2010 / 11 / qe2. bis central bankers ’ speeches “ thoughts on qe2 ”, available at other economic policy options in addition to possibly implementing a new stage of quantitative easing, many analysts have mentioned the need for adopting other measures to offset the weak performance of advanced economies. the first policy consists of new fiscal stimulus programs aimed at raising public expenditure and reducing taxes. in view of the unsustainable path of publicdebt - to - gdp ratio projected for the united states and other advanced economies, the supporters of this alternative combine stimulus with a long - term fiscal consolidation program that would begin in a few years. although it might seem appealing, this initiative faces a lack of credibility on future fiscal adjustment because today ’ s authorities do not want to deal with the costs associated with any current austerity measures. in fact, the fiscal adjustment needed to begin stabilizing the public debt would probably have a negative impact on such economies in the short term. a second option is, unfortunately, the return to the old idea that having higher inflation is beneficial either to boost the economy ’ s nominal gdp or to handle the “ liquidity trap ” or to dilute high public debt levels. this proposal has multiple drawbacks, the most notable being ignoring past lessons. a monetary policy aimed at creating more inflation could enhance nominal gdp but not necessarily real gdp if, for instance, inflation is perfectly anticipated. also, as i mentioned, qe has ruled out the scenario in which monetary policy ends when the policy interest rate reaches zero. on the other hand, the inflationary dilution of debt, apart from being extremely unfair, deteriorates the credibility of government commitments and raises the financing cost of government debt. in any case, central bank capacity to control inflation may be weakened. a third and more reasonable option is to identify and correct the fundamental factors that are behind low economic growth. one possibility is that some economic

will not go through them in detail, except to highlight the two broad themes in play. first, investors have become concerned about the fiscal positions of some european countries, leading them to re - price sovereign risk for those countries and to question whether austerity measures and other supporting efforts will prove sufficient to restore market confidence. second, investors have increasingly worried about the exposures of european financial institutions to these countries and to european growth prospects more broadly. these uncertainties have led to sharp declines in the share prices of those financial the views and opinions expressed are mine alone and do not necessarily represent the views of the federal open market committee or the federal reserve system. institutions and have affected the ability of many of them to fund themselves in short - term credit markets. the successful resolution of these problems ultimately rests on european policy actions. those actions will determine the degree of fiscal adjustment that is required over time, the amount of fiscal support and risk sharing among european countries that is appropriate, and the extent to which european financial institutions are supported. the federal reserve had only a limited and supportive role in the policy response, taking steps to allow the european central bank and other foreign central banks to respond more fully to emerging liquidity pressures. the liquidity pressures that have emerged stem from the balance sheets of european financial institutions. those institutions still hold large amounts of dollar - denominated assets and finance a sizable portion of those holdings in short - term dollar - denominated funding markets. in the presence of concerns about the status of these institutions, investors have become more reluctant to extend term funding to many of them, putting upward pressure on term funding rates and forcing the firms to change their funding patterns. to help prevent strains in dollar funding markets from intensifying and spreading, and hence creating more widespread pressure on financial markets, the federal reserve established liquidity swap arrangements with the bank of canada, the bank of england, the european central bank, the swiss national bank and the bank of japan. these arrangements provide foreign central banks with the capacity to deliver us dollar funding to institutions in their jurisdictions. the credit is extended by the foreign central bank against the collateral that each accepts, and the interest generated from those transactions is returned to the federal reserve. from the perspective of the federal reserve, the liquidity swap arrangements are safe. after all, the federal reserve is extending credit to the foreign central bank and not to the financial institutions that obtain dollar funding. the credit we extend to the foreign central bank is collateralized by foreign