scholarly journals Can Monetary Policy Prevent Financial Crises?

2020 ◽  
pp. 51-75
Author(s):  
Dr. Ioannis N. Kallianiotis
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Crisis ◽  
Financial Crises ◽  
Global Financial Crisis ◽  
Open Market ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Federal Funds Market ◽  
New Instruments

Monetary policy is an important public policy, but it is not the only one to stabilize our economy and reduce its business cycles. The leading central bank, the Federal Reserve of the U.S., has introduced, after the 2008 global financial crisis, new instruments and unusual facilities to implement its new innovative monetary policy. The financial world and mostly the social scientists watch as the Federal Open Market Committee (FOMC) decides on a target interest rate in the federal funds market for the next period. The framework that the FOMC uses to implement monetary policy has changed over the last twelve years and continues to evolve today. Here, we try to evaluate the new instruments and their “effectiveness”. Before the 2008 financial crisis, policymakers used one set of traditional instruments (tools) to achieve the target rate. However, several policy interventions, introduced soon after the crisis, drastically altered the landscape of the federal funds market and the traditional economic theory. This new and uncertain environment, with enormous reserves and even interest on reserves, necessitated a new set of instruments by the Fed for its monetary policy implementation. Lately, after seven years of zero interest rate, the FOMC began in December 2015 to increase the target rate and then, went back again to a lower one, but many questions arise. How did they evaluate the effectiveness of these new instruments? Is the current federal funds rate the appropriate one for our economic wellbeing? How efficient was so far this ZIR monetary policy after the latest global financial crisis? Why the Fed put all these burdens of its ‘innovated” new monetary policy to the poor taxpayers (bail out) and to the risk-averse depositors (bail in)? Is it possible for the Fed’s policy to prevent the future financial crises? The federal funds rate was very low and affected negatively the financial markets (bubbles were growing), the real rates of interest (it is negative for twelve years), and the deposit rates (they are closed to zero for twelve years). The redistribution of wealth of depositors and taxpayers continues, which means the true economic welfare is falling and a new global recession was in preparation, if the current unfair easy money policy will persist, ignoring the necessity of a prevention of financial crises. Then, it came as an unexpected plague the coronavirus pandemic, following with a new but, the worse in economic history global crisis (chaos).

scholarly journals Rewriting Monetary Policy 101: What’s the Fed’s Preferred Post-Crisis Approach to Raising Interest Rates?

2015 ◽  
Vol 29 (4) ◽  
pp. 177-198 ◽  
Author(s):  
Jane E. Ihrig ◽  
Ellen E. Meade ◽  
Gretchen C. Weinbach
Keyword(s):  
Monetary Policy ◽  
Financial Crisis ◽  
Interest Rates ◽  
Large Scale ◽  
Global Financial Crisis ◽  
Banking System ◽  
Open Market ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Standard Textbook

For many years prior to the global financial crisis, the Federal Open Market Committee set a target for the federal funds rate and achieved that target through small purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large-scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed's implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the Federal Open Market Committee's target will not work in current circumstances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

scholarly journals Interest Rate Forecasts in Conventional and Unconventional Monetary Policy Periods

2015 ◽  
pp. 1-4 ◽  
Author(s):  
Nelson Oliver ◽  
Mehmet Pasaogullari
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Crisis ◽  
Forecast Accuracy ◽  
Policy Tools ◽  
Unconventional Monetary Policy ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Before And After

Monetary policy has been conducted with a different set of tools since the financial crisis, and we investigate whether the change has affected the accuracy of professionals’ interest-rate forecasts. We analyze the accuracy of federal funds rate and nominal Treasury yield forecasts in the periods before and after the introduction of new policy tools and find that, in general, forecast accuracy improved in the latter policy period.

scholarly journals Implementing Monetary Policy after the 2008 Financial Crisis

2019 ◽  
Vol 7 (9) ◽  
pp. 141-172
Author(s):  
Ioannis N. Kallianiotis
Keyword(s):  
Monetary Policy ◽  
Financial Crisis ◽  
Interest Rates ◽  
Global Financial Crisis ◽  
Target Range ◽  
Federal Funds ◽  
2008 Financial Crisis ◽  
Policy Interventions ◽  
Federal Funds Market ◽  
The 2008 Financial Crisis

Every six weeks or so (9 times during the year), the financial world watches as the Federal Open Market Committee (FOMC) decides on a target interest rate in the federal funds market for the next period. But what happens next? How do policymakers make sure that interest rates in the fed funds market trade within the target range? What will be the effect of the new target rate on the Wall Street and the Main Street? How efficient is so far the monetary policy after the latest global financial crisis? Is the target rate the correct one? The framework that the FOMC uses to implement monetary policy has changed over the last decade and continues to evolve today. Before the 2008 financial crisis, policymakers used one set of instruments to achieve the target rate. However, several policy interventions introduced soon after the crisis drastically altered the landscape of the federal funds market. This new and uncertain environment, with enormous reserves, necessitated a new set of instruments for monetary policy implementation. Lately, after December 2015, as the FOMC began to unwind the effects of these policy interventions, some questions arise: What rules will be followed by the Fed? What happens next as the federal funds market converges to a “new normal”? How effective will be the new policy? Can the Fed prevent a new crisis? The federal funds rate is very low and affects negatively the financial markets (bubbles are growing), the real rates of interest, and the deposit rates, which means the true economic welfare is falling and a new global recession is in preparation, if the latest easy money policy will continue.

scholarly journals Comparison of the Approach of the Czech National Bank and the European Central Bank to the Effects of the Global Financial Crisis

2021 ◽  
Vol 10 (2) ◽  
pp. 18-46
Author(s):  
Andrea Cecrdlova
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Crisis ◽  
Central Bank ◽  
European Central Bank ◽  
Global Financial Crisis ◽  
Central Banks ◽  
European Central ◽  
National Bank ◽  
The Global Financial Crisis

The latest global crisis, which fully erupted in 2008, can have a significant impact on central banks credibility in the long run. During the last crisis, monetary authorities encountered zero interest rate levels and, as a result, started to use non-standard monetary policy instruments. The Czech National Bank decided to use a less standard instrument in November 2013, when it started to intervene on the foreign exchange market in order to keep the Czech currency at level 27 CZK / EUR. However, the European Central Bank also adopted a non-standard instrument, when chose a path of quantitative easing in 2015 in order to support the euro area economy by purchasing financial assets. The question remains whether the approach of Czech National Bank or the approach of European Central Bank in the crisis and post-crisis period was a more appropriate alternative. With the passage of time from the global financial crisis, it is already possible to compare the approaches of these two central banks and at least partially assess what approach was more appropriate under the given conditions. When comparing the central banks approaches to the crisis, the Czech National Bank was better, both in terms of the rate of interest rate cuts and the resulting inflation with regard to the choice of a non-standard monetary policy instrument. The recent financial crisis has revealed the application of moral hazard in practice, both on behalf of the European Central Bank and the Czech National Bank, which may have a significant impact on their credibility and independence in the coming years.

scholarly journals SISTEM MONETER DALAM PERSPEKTIF EKONOMI ISLAM

ALQALAM ◽  
2012 ◽  
Vol 29 (1) ◽  
pp. 141
Author(s):  
ZAINI IBRAHIM
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Crisis ◽  
Economic System ◽  
Global Financial Crisis ◽  
Market Price ◽  
National Income ◽  
Monetary System ◽  
Goods Market ◽  
The Interest Rate

In many economic literatures, economy is divided into two sectors, real sector which covers seroice market and goods market, and monetary sector which consists of money market and equity market. In a part of economic system, monetary that runs in a country will affect the economic rate. Monetary economy can be applied in a polity, called monetary policy. In a conventional discussion, a monetary policy is run in order to reach the increase of national income, to stabilize market price, and to control the inflation rate. To get the goal of that macro-economy, the interest rate is used, in which it becomes the weakness of conventional monetary system. The use of interest rate, furthermore, has caused the economic crisis, indeed global financial crisis. In term of new economic system needs, Islamic monetary system riflers a solution to overcome financial crisis. The riffered system is asset based transaction, free of interest, avoidance of transactions containing speculation (maisir) and uncertainty (gharar). Moreover, it also uses stable curencies, i.e. dinar and dirham. Keyword: Monetary system, interest rate, fiat monry, dinar, dirham.

scholarly journals Forecast accuracy of a BVAR under alternative specifications of the zero lower bound

2017 ◽  
Vol 21 (2) ◽  
Author(s):  
Tim Oliver Berg
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Lower Bound ◽  
Forecast Accuracy ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Policy Shocks ◽  
Density Forecasts ◽  
Effect Of Monetary Policy

AbstractThis paper discusses how the forecast accuracy of a Bayesian vector autoregression (BVAR) is affected by introducing the zero lower bound on the federal funds rate. As a benchmark I adopt a common BVAR specification, including 18 variables, estimated shrinkage, and no nonlinearity. Then I entertain alternative specifications of the zero lower bound. I account for the possibility that the effect of monetary policy on the economy is different in this regime, replace the federal funds rate by its shadow rate, consider a logarithmic transformation, feed in monetary policy shocks, or utilize conditional forecasts allowing for all shocks implemented through a rejection sampler. The latter two are also coupled with interest rate expectations from future contracts. It is shown that the predictive densities of all these specifications are greatly different, suggesting that this modeling choice is not innocuous. The comparison is based on the accuracy of point and density forecasts of major US macroeconomic series during the period 2009:1 to 2014:4. The introduction of the zero lower bound is not beneficial per se, but it depends on how it is done and which series is forecasted. With caution, I recommend the shadow rate specification and the rejection sampler combined with interest rate expectations to deal with the nonlinearity in the policy rate. Since the policy rate will remain low for some time, these findings could prove useful for practical forecasters.

scholarly journals Non-Standard Measures of the Monetary Policy – Mechanism for Overcoming Problems in the Implementation of the Neoliberal Concept of Monetary Policy During a Financial Crisis

2017 ◽  
Vol 55 (4) ◽  
pp. 465-480
Author(s):  
Andriana Milošević ◽  
Mirjana Jemović
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Crisis ◽  
Global Financial Crisis ◽  
Policy Instruments ◽  
Developed Countries ◽  
Central Banks ◽  
Liquidity Provision

AbstractAfter multiple decreases in the reference interest rate and its reaching zero bounds in certain countries during the recent global financial crisis, central banks in developed countries have started applying non-standard measures of monetary policy. This does not refer to introducing new monetary policy instruments, but rather to a certain relativisation within the framework of standard instruments, in terms of maturity of liquidity provision, collateral policy and counterparties. Therefore, the aim of this paper is to examine the role of non-standard measures of monetary policy as a mechanism for overcoming problems in the implementation of the neoliberal concept of monetary policy in the conditions of the financial crisis. The answer to this question is rather sensitive, considering the fact that the neoliberal concept was supported by the most developed countries, that is, in fact, their central banks were using non-standard instruments of monetary policy for the greatest part.

scholarly journals The Federal Funds Market since the Financial Crisis

2017 ◽  
pp. 1-4 ◽  
Author(s):  
Ben R. Craig ◽  
Sara Millington
Keyword(s):  
Financial Crisis ◽  
Commercial Banks ◽  
Banking System ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Excess Reserves ◽  
Federal Funds Market ◽  
Federal Home Loan Banks ◽  
Government Sponsored Enterprises

Before the financial crisis, the federal funds market was a market in which domestic commercial banks with excess reserves would lend funds overnight to other commercial banks with temporary shortfalls in liquidity. What has happened to this market since the financial crisis? Though the banking system has been awash in reserves and the federal funds rate has been near zero, the market has continued to operate, but it has changed. Different institutions now participate. Government-sponsored enterprises such as the Federal Home Loan Banks loan funds, and foreign commercial banks borrow.

scholarly journals The consequences of unconventional monetary policy in euro area in times of monetary easing

2018 ◽  
Vol 9 (4) ◽  
pp. 581-615 ◽  
Author(s):  
Martin Pažický
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Crisis ◽  
Euro Area ◽  
Global Financial Crisis ◽  
Value Added ◽  
Structural Var ◽  
Unconventional Monetary Policy ◽  
Robustness Check ◽  
Multiple Robustness

Research background: In this research paper, an attempt is made to evaluate the impacts of ECB’s unconventional monetary policy which has been applied after Global Financial Crisis. Because of the new economic and monetary conditions, the effectiveness of conventional monetary tools has been questioned. Purpose of the article: Designed models examine the consequences of unconventional monetary policy for macroeconomic variables, monetary variables and interest rates in the euro area. Particular attention is paid to the response of the price level, represented by HICP, to various monetary policy innovations. Except a shock in credit multiplier and asset purchase programme (APP), also the effectiveness of a conventional monetary tool, such as main refinancing operation (MRO) interest rate, is inspected. Methods: Use has been made of impulse responses from structural VAR models to analyze a large sample that covers the time horizon of 1999 to 2016. Several econometric tests are performed to provide a profound analysis. The conclusions from baseline models are verified in multiple robustness check models, which are specified under alternative conditions. Findings & Value added: It has been found that, in the aftermath of the Global Financial Crisis, conventional monetary instruments are effective in the short-run. In the long-run, unconventional monetary policy has a greater potential to stabilize the economy than the traditional interest rate transmission channel. The conclusions from the baseline models are verified in multiple robustness check models, which are specified under alternative conditions.

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