Getting the policy mix right

The Federal Reserve's newsmaking interventions over the past several months have reduced the likelihood of a severe economic downturn as a consequence of a credit crunch. At the same time, news coverage of inflation is raising eyebrows on Wall Street and among economists. Is monetary policy on the right track? Are we asking too much of monetary policy? To understand the credit crunch and evaluate Fed interventions, it is important to understand the relationship between capital and liquidity i