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Submitted by Maya Eden on
Thank you for this comment. I absolutely agree with both points that you raise: first, price adjustments are often very slow and painful - so there is an argument for bailing out the financial system during crises, even if the "long run" goal should be reducing the economy's dependence on finance. This should be done gradually in a way that is mindful of transitional costs. Second, the Argentinian example raises a broader point regarding the relevance of this mechanism in a small open economy framework (where "dollar prices" matter). In a small open economy, the extent to which domestic credit can affect the price index is naturally more limited. To realize the entire welfare gains, reduction in financing should be done in an internationally coordinated fashion.